We will not take risks with this recovery ...

We will not take risks with this recovery …
The Bank of England will not take risks with this recovery, according to the latest statements from Mark Carney, Governor of the Bank of England. Base rates will remain on hold for some time yet.

When they begin to rise, the increase will be slow and gradual. It will be many years before fair value base rates of 4.5% will be on the agenda, according to the guidelines issued this week.

Markets anticipate the first rate rise may appear in the second quarter of 2015. Thereafter a rise to 2% may be possible but not until the end of 2016 or the beginning of the following year 2017. “The level of interest rates necessary to sustain low unemployment and price stability will be materially lower than before the crisis,” the more cryptic quote.

The recovery has gained momentum. Output is growing at the fastest rate since 2007, jobs are being created at the quickest pace since records began and the inflation rate is back at 2%. “The recovery has been underpinned by a revival in confidence, a reduction in uncertainty, and an easing in credit conditions”. Yes, Forward Guidance has been a success!

The Bank of England expect the economy to grow by 3.8% this year and 3.3% next year assuming interest rates are held at 0.5% through 2014 and into 2015. Assuming rates follow the path outlined in current market profiles, growth will be a more modest 3.4% this year falling to 2.7% next.

A recovery neither balanced or sustainable …
No wonder the Bank consider the recovery is neither balanced nor sustainable. The recovery is dependent upon household spending, with a sluggish investment performance to date and a structural trade deficit, exacerbated by weak growth in Europe.

Growth of 3.4% is significantly above trend rate and above most forecasts for the year. Consensus forecasts predict growth of just 2.7% in 2014 falling to around 2.5% next. The bank is very bullish on a recovery in earnings, consumer spending and investment. We shall see who is right in due course. For the moment, the Bank looks hot!

So what of Forward Guidance …
Forward guidance may have been a success but the single point reference to the unemployment rate has been beset with problems. The 7% guideline for unemployment will be breached in the first quarter this year. Hence the single point guideline is on the way out. It was too easy to understand. The Governor will not be allowed to make the same mistake again. The Bank collective has had its way. “To allow others to monitor how the economy is evolving relative to our projections, today we are publishing forecasts of 18 more economic indicators.” Excellent.

Yes, now we will have eighteen guidelines to better understand policy. The output gap is back, as is the meandering NAIRU. Eighteen reasons why it will prove more difficult to pin the Governor in difficult interviews on Newsnight in the future.

It was never clear why 7% was the correct number to choose anyway. The Americans bagged the 6.5% level first but the Governor admitted the long term NAIRU was more like 5% anyway. It was just a number but at least we could “see it” so to speak. Not so the “Output Gap”. What is the size of the output gap? What colour are the eyes of a Yeti? an equally productive debate. In a service sector economy with limited supply constraints, does it really matter anyway? Forward Guidance is a great step forward. Simplicity, part of the success, made the process just too transparent for some.

Forward Guidance USA …
Over in the USA, Janet Yellen, as the new Chair of the Fed provided assurances there would be policy continuance following the Bernanke regime. Accommodative monetary policy, with progressive tapering remains on the agenda. The US is expected to grow by almost 3% this year with inflation below 2%. Unemployment will fall below 6.5% through the year. So what of forward guidance, - markets believe a rise in base rates may be possible towards the end of this year or early next.

So what happened to sterling?
The pound closed up at $1.6730 from $1.6407 and 1.2220 from 1.2030 against the Euro. The dollar closed at 1.3690 from 1.3635 against the euro and 101.82 from 102.31 against the Yen.

Oil Price Brent Crude closed at $108.56 from $109.57 The average price in February last year was almost $116.

Markets, moved up - The Dow closed at 16,105 from 15,794 and the FTSE closed at 6,663
from 6,571.

UK Ten year gilt yields closed at 2.80 from 2.71 and US Treasury yields closed at 2.74 from 2.69. 

That’s all for this week. No Sunday Times and Croissants tomorrow or for the rest of this year for that matter. We are taking a break in this pre election year.

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© 2014 The Saturday Economist by John Ashcroft and Company. Experience worth sharing.

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