jueves, 15 de agosto de 2013

jueves, agosto 15, 2013

August 13, 2013 7:30 pm
 
Carney has not yet bent the markets to his will
 
There are limits to what a central bank can credibly promise, writes Martin Sandbu
 
Ingram Pinn illustration©Ingram Pinn illustration
 
It was not quite the debut that Mark Carney must have hoped for when, last Wednesday, the Bank of England’s new governor presented his policy of forward guidance to the markets. His aim was to shift investor expectations of how soon the central bank is going to tighten the monetary purse strings – but he failed, which speaks volumes about the constraints on the governor.
 
In July, the BoE had announced, after Mr Carney’s first Monetary Policy Committee meeting, that market forecasts of interest rate rises were “unwarranted. The governor repeated this last week and promised that he would prove markets wrong. The MPC pledged that, unless there were threats to price or financial stability, it would not tighten policy until unemployment had fallen to 7 per cent.
 
This should have reassured investors that rates would remain low. But market rates jumped on the announcement and are higher today than they were a week ago. The pound is up about 1 per cent against the dollar and the euroyet moreunwarrantedbehaviour. Mr Carney is in good company: Ben Bernanke, chairman of the US Federal Reserve, sent rates up with remarks intended to achieve the opposite.
 
Both episodes should leave us concerned. The BoE has never before made commitments to future decisions. As game theorists, diplomats and gangsters have long known, if you have a big enough weapon, you rarely have to wield it, provided those you speak to believe in your willingness to use it. So forward guidance ought to have potentially dramatic effects.

Control of the currency is the biggest economic policy making weapon there is. The BoE’s monopoly on money-printing enables it to move interest rates where it wants.
 
So if the words were clear, which Mr Carney’s were, and the size of the arsenal is not in question, which it is not, why can a central bank not browbeat markets into submission? The obvious answer is that there are credible constraints on what a central bank can promise. A look at what these are reveals that Mr Carney’s imperfect start was partly due to the timidity of decisionsnot all the BoE’s – that came before.

First, the MPC is constrained by the law. It can only go so far to support economic activity before breaching its principal duties to ensure price and financial stability. Hence Mr Carney’sknockoutclauses, which suspend forward guidance when inflationary threats appear on the horizon. That limits the force with which guidance can make markets believe the BoE’s intention to keep rates low.

Even if the law is an ass, it is not for central bankers to change it. It was George Osborne, the chancellor, who at this year’s Budget called for monetary activism, but not so much as to upset voters who believe in a natural right to good returns on their savings. He could have given the MPC more leeway to ignore price changes – from the world economy or one-off policy changes – that do not trigger domestic inflation spirals. Even within the remit, the BoE can focus more boldly and explicitly on the most relevant bits of inflation.

Second, the BoE cannot elude the tyranny of models. Mr Carney was wise to make guidance conditional on how the economy behaves rather than set it for a specific length of time. But while the BoE thinks unemployment will stay above the threshold until 2016 at least, others are more optimistic about the economy. They expect unemployment to fall or inflation to rise before Mr Carney does. So the BoE, obliged to follow its model but unable to stop others from following theirs, cannot fully convince markets that it will be able to keep rates low for that long.

Third, Mr Carney’s scope for remoulding investors’ expectations is constrained by their expectations of him. His arrival at the BoE certainly ushers in greater monetary activism. But financiers wanted something more radical still. Many found Mr Carney’s promises less ambitious and more hedged than they had hoped. They will have concluded that an MPC that shied away from further activism without him will limit how far he can go. So, despite his protestations to the contrary, his promise not to raise rates while unemployment exceeds 7 per cent was seen as a sign of a rise as soon as that threshold is reached.

These problems should give pause to both sides of the austerity debate. The government and the supporters of its fiscal strategy have maintained that monetary policy can pick up the slack in demand. Its opponents have dismissed the need for consolidation to prevent a bond-market rebellion as an irrational belief in “confidence fairies”: a central bank in control of its currency can always keep rates low, they say. Mr Carney’s stumble casts doubt on both sides.

In theory, both are right: Mr Carney and the MPC can impose their will on markets. But they have a fight on their hands to do so. Monetary policy can only stimulate demand or keep a state liquid if it has traction on the economy. The weapon will need to be wielded. More activism is needed – whether in the form of yet lower (or negative) short-term interest rates, more purchases of gilts and, perhaps, private debt, or outright targeting of specific market rates.

Monetary policy is still powerful: low rates and “Funding for Lending”, a scheme to encourage bank lending, have made for record house prices. More power must be directed to where credit is scarce. We should not worry about inflation – if we strip out volatile or policy-driven elements, it stands at 1.5 per cent, according to Citigroup. Lack of monetary confidence is just a lack of confidence. This remains a time for boldness.
 
 
Copyright The Financial Times Limited 2013.

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