Canadians might remember former Bank of Canada Governor Mark Carney for his repeated assurances that the overvalued Canadian housing market could come off its unprecedented highs without crashing. Or for the Bank of Canada’s famously bullish growth forecasts under his tenure, which often proved wrong. (That tendency, as my colleague Tamsin McMahon recently reported, is admittedly alive and well even under Carney’s successor, Stephen Poloz.) Today, though, in his first public speech as Governor of the Bank of England, Carney struck a radically different, and decidedly blue, note.
Addressing a business audience in Nottingham, Carney was at pains to tell Britons that they should curb their enthusiasm about a recent string of good news about the U.K. economy.
“What I hear from businesses here and elsewhere is that a renewed recovery is taking hold amid a rising tide of optimism,” the governor said in prepared remarks. But, he said, the U.K. has little for which to tap itself on the shoulder. Over the past five years, he noted, “Germany has grown by 2%, the US by 5%, Australia by 13% and China by more than 50%. Meanwhile the UK economy still produces 3% less than it did five years ago.”
Carney was defending the BoE’s recent, controversial decision to hold short-term interest rate steady until unemployment in the U.K., currently at 7.8 per cent, falls to at least seven per cent.
That pledge, meant to stimulate the economy by encouraging households and businesses to borrow, hasn’t had the desired effect so far. Long-term yields and the sterling have been climbing recently, moving in the opposite direction the BoE had hoped and raising questions about whether investors believe the bank will change its mind and hike rates sooner than it promised.
Part of that upward movement, Carney said, is likely inevitable, as it reflects expectations that the U.S. Federal Reserve is soon going to slow down the pace of its current-bond buying program, which is pushing up long-term yields around the world. Still, if tlong-term borrowing costs in the U.K. are rising also because investors believe the British unemployment rate will hit seven per cent faster than the Bank of England forecasts, they’re deluding themselves, Carney warned. A better-than-expected economic performance would be welcome news, but it’s very unlikely. “Policy is built not on hope, but on expectation,” the governor remarked.
Carney’s concern is that interest rates might rise too soon, potentially choking a still weak recovery. “What matters is that rates won’t go up until jobs and incomes are really growing,” he said.
“I certainly have no hesitation in raising interest rates when required,” the governor reminded his audience. “When I was Governor of the Bank of Canada, we raised interest rates as the recovery there gathered pace. But that was the appropriate policy for Canada at that time.”
Mark Carney, it seems, is no incurable optimist after all.