Well, not much has happened in terms of interest rates since
my last post in November: interest rates still stuck at 0.5%. However, excellent news that Jonathan Haskell
is to join the committee. Well, there has been prevarication and
procrastination. Interest rates were set to rise, and then not. Mark Carney
continues to have a depressing effect on Sterling. His latest magisterial
intervention was the interview with Kamel Ahmed on the BBC on 19th
April. Prior to that expectations had
been gathering for a 0.25% increase in interest rates. In the interview he stressed the possibility
that increases might happen later rather than sooner. Sterling was then at
$1.43. After that interview, Sterling fell
and has continued to fall, reinforced by the May 9th MPC decision to
keep interest rates fixed. Sterling is now at $1.33. The “Blame Brexit” P.R. campaign has been
kept up. Of course, Brexit and weak
growth have had an effect on Sterling, but I would suggest that Carney’s
interventions have (as usual) talked down Sterling. Andrew Haldane voted for a rise in rates on
20th June (joining Saunders and McCafferty), leading to speculation in the press that maybe
there will be a rise in August.

When I contrast the lack of forward guidance and clarity in
what the MPC policy is, the contrast with the FED is complete. As early as
2014, the FOMC (the US equivalent of the MPC) had clearly laid out a plan. Raise interest rates, and then start to run
down the holdings of Treasuries accumulated under QE. The interest rate rises started in December
2015, with the rate hitting 2% in June this year, with the possibility of more
in the pipeline. The FOMC has regularly updated its policy statements on the
issue and indeed at the end of 2017 it has started to slowly unwind QE by
letting its holdings of treasuries and Mortgage backed securities decline. In contrast, the MPC has not issued a formal
statement on interest rate policy and unwinding QE.

History will not judge the Carney governorship kindly. However,
to look on the bright side, the Bank has started to talk about real interest
rates. Gertjan Vleighe gave a speech
talking about them last November. Excellent news. I am not sure I buy his idea that “low rates”
can be a normal state of the economy (the
example of world war two and the years just before and after has little
relevance for today). However, once you
accept the idea that the equilibrium real interest must be non-negative, it at
least puts a floor on sensible nominal rates (they should be no less than
inflation). Assuming inflation will be
on target, that would imply nominal
interest rates of at least 2%.

Also there is talk of Carney’s successor. Luckily the menopausal Broadbent has ruled
himself out. In my opinion, the idea of a Goldman Sachs alumnus as governor of
the Bank is not a good idea. There are
some excellent people for the job: Sir Charles Bean (Mervyn King’s number 2) to
name one. But why not go for a non-banking person. Kate Barker would make an excellent choice in
my opinion. She is a leading business economist and was on the MPC from 2001 to
2010.