Carney’s first go: Forward mis-guidance?

By Ewan Pearson

I was once asked by a host at a dinner to keep my speech short, as it was expected, and it was just before we ate. I simply said “Thank you”. This got a rapturous round of applause, several slaps on the back, and we all sat down to eat in a jolly mood. Probably my easiest speech, if a bit daring. It would seem that Mark Carney, got a similar initial response, although he spoke for somewhat longer than I did when he gave his first big speech. So, did he get it right?

Mark Carney, a Canadian, and formerly the Governor of the Bank of Canada, had a ‘good recession’. He led his country through that turmoil and came out this end with his reputation enhanced. He
was snaffled away to be our Central Bank Governor. He took over at the Bank of England (BoE) on 2nd July 2013.

Everyone gets a little time to settle in, although he seemed to be making his mark (pardon the pun) before he even
got here, with lots of UK press coverage telling us what he would do and say. He managed despite that to stay pretty enigmatic until well after starting. He gave his first press conference on Day One, after arriving unsportingly early,
and unconventially by ‘tube’ (London’s underground trains). He made his first big policy announcement on 7th August, but waited until 28th August to give his first keynote address. And he did so in the rather unusual setting of a business conference in Nottingham. Clearly he’s a comfortable traveller.

Mark Carney kicks off his speaking role as the new BoE Governor

Mark Carney kicks off his speaking role as the new BoE Governor

His aim at this conference was to reconfirm and re-emphasise his clear ‘forward guidance’ from 7th August on when we should expect him and his colleagues on the Monetary Policy Committee (MPC) to raise Base Rates.

The UK Base Rate has been set at the historically record low of 0.5% since 5th March 2009, also therefore an unprecedented period of very low rates.

If you believe the initial reaction on 7th August from the “teenage scribblers” as Nigel Lawson once called them (aka The Press), he seemed to have done a very good job. The TV, Radio, and Press coverage all complimented him on his speaking style – his pitch, fluency and pacing. They commented that he spoke with great clarity, brevity and simplicity
of message, perhaps for the first time for a Governor.

Put simply his message was, with caveats, that “we won’t consider raising Base Rates until UK unemployment falls to 7%.” He went further, stating that this was unlikely to happen until well into 2016.

The media also complimented his confident and persuasive delivery. For example The Daily Telegraph the following morning carried the caption that he had used “…his first speech as governor to convince sceptics of his pledge to keep interest rates at a record low for the next three years”. He had set out a clear and sensible set of parameters that would give the BoE’s view on interest rates for some time forwards. Implication: All we would need to do is watch unemployment rates.

But then the picture changed. The persuasion went into reverse. The devil was in the caveats, which together meant that the BoE could change rates pretty much any time they wanted. The Fourth Estate (another euphemism for The Press) oversimplified the detail, claiming that Carney would probably raise rates sooner, and the “markets” reacted by also believing that rates would rise sooner than Carney said, and immediately put their own interest rates up.

This was precisely what Carney had aimed to avoid.

Kathleen Brooks of commented on 7th August: ‘Is Carney a banker or a lawyer? He couched the announcement on forward guidance with an economic threshold with so many escape clauses it sounded more like he was reading a disclaimer…’

That is why Carney had to come out again three weeks later, and use some of his colleagues too, to restate the original key message that Base Rates would stay low for a further 3 years. But it was too late, the damage had been done and since then rates have remained stubbornly elevated with a forecast first increase in Base Rates for late 2015. Sterling has been stronger too.

It is worth restating Carney’s Caveats. He first generalised that the MPC members “do not intend to raise the base rate at least until the unemployment rate falls to 7%, provided there are no material threats to either price or financial stability”

He later defined his caveats:

  1. Price stability – if there are signs of inflation rising, specifically 2.5% or more 18-24 months ahead. He gave this a 40% probability!
  2. “Medium term inflation expectations are not well anchored”. The vagueness of this clause has left people spinning with its comparative lack of precision.

In combination, it is easy to see why observers did not find his position on Base Rates tenable. The second caveat would not have become a problem if the first had seemed unlikely, but with the first so likely, the assumption is that the second caveat is too, and therefore the commitment does not hold.

So what can we learn from this study?

First that the key damage was done by the use of heavy caveats. The % chance given was too high, with the result that they completely undermined his key message with a big hole below the water line. We’ve all heard the phrase “terms and conditions apply”, with cynicism.

I am quite sure that Carney meant to say what he said, that his % was right, and that the caveats are very important, but their combined effect was devastating. So the first message to you is this: Don’t use them unless you are sure you can control their effect.

My second message is that if you use such caveats, make sure they do not take precedence over the key messages. They have to be in the background. The context is very important as a signal of their probability.

Strangely, if Carney had left them undefined as per the bold/italics quote above, observers might have accepted their subordinate position, although there would then have been several complaints about their vagueness.

The key thing with any get-out clauses is that they should not actually appear to be get-out clauses!

Carney relaxes at a music concert near Oxford after a tough day at the office.

Carney relaxes at a music concert near Oxford after a tough day at the office.

Their probability or likelihood must be perceived as unlikely for the key tenet of your message to hold firm.

There is another way to look at this though, the opposite way: If you want to seem definite about a course of action, but in reality want to give yourself a great deal of optionality, then stick in some caveats. Keep them a bit vague, or in a state where they are immeasurable.

There you go, “Bob’s your Uncle”, a well known phrase, and I think it means ‘job done’, via some Cockney Rhyming Slang, as in Uncle Bob = Job.

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