LONDON (Reuters) - If Mark Carney planned his first media outing as ‘superstar’ chief of the Bank of England to reassure the British public of the bank’s efforts to juice up Britain’s weak recovery, he could be back at the drawing board this evening.
In a steely performance, the former Goldman Sachs banker struggled to demystify for the press the intricacies of “forward guidance” - advance notice that he’s not going to tighten monetary conditions too fast or too soon.
Carney struck a distinctly technical tone when trying to explain when the benchmark interest rate might rise above the current 0.5 percent, the lowest in the bank’s 319-year history.
Reporters were given 109 pages of analysis and graphs to accompany Carney’s new policy, which boils down to keeping interest rates low unless unemployment falls below 7 percent.
That could be dropped if three caveats - or knockouts - are triggered: inflation expectations top 2.5 percent, financial stability is threatened, or medium-term inflation expectations no longer remain sufficiently anchored.
“With so many caveats, it’s hard to quantify what it actually means,” said Laurence Harvey, a self-employed online product director, on his lunch break in Spitalfields Market in London.
“Obviously, I want interest rates to stay low for my mortgage, but with those caveats hanging around, that’s not really much of an indicator,” he said. “It doesn’t make me want to spend over and above what I was thinking of doing anyway.”
Carney took to the airwaves later on Wednesday to further clarify the policy on all Britain’s major broadcasters.
Carney, a 48-year-old Canadian, was lured to one of the most powerful jobs in central banking by Chancellor George Osborne, with a mandate to help jolt Britain out of stagnation. He took up his new post on July 1 - just as the $2.5 trillion economy appears to be on the road to a housing-led recovery.
Billed as the best man for the job by Osborne and granted one of the highest central bank salaries in the world - a package of 874,000 pounds ($1.34 million) - Carney’s ‘big bang’ for British monetary policy didn’t have quite the intended impact, as investors brought forward expectations for when rates would rise.
“It is very complicated - I liken the framework to a sort of structured finance note - guidance threshold, three separate knockout triggers, it is all quite messy,” said Trevor Greetham, asset allocation director for Fidelity’s Investment Solution Group, who has direct responsibility for $14 billion of assets.
Feted as a superstar of central banking after helping steer Canada through the fallout from the crisis by pledging to keep interest rates low for more than a year, Carney said he wanted to reach ordinary people with his forward guidance.
“Our biggest concern is the possibility that as the recovery gathers pace that there is an unwarranted change in expectations about the pace of the withdrawal from monetary policy stimulus,” Carney told reporters when asked what his biggest worry was about the British economy.
He was asked for a second stab, for clarification.
“The message is that the MPC is going to maintain the exceptional monetary policy stimulus until unemployment reaches a 7 percent threshold, at which point we will reconsider,” he said. “We will do this while maintaining price and financial stability.”
After the deepest crisis since the Great Depression, that may be a difficult sell to a public that is sceptical at best about the promises of politicians, bankers and central banks.
“Its slightly complicated really, isn’t it?” said Monica Kelly, a 40-year-old social worker.
“I‘m sure it means something to some people, but I‘m quite ignorant when it comes to this, so it doesn’t mean a huge amount to me ... It doesn’t really make me want to change my spending at all.”
In contrast to his predecessor, Mervyn King, Carney steered clear of sports analogies during the press conference, which focused on the “knockout” conditions that could prompt any possible rise in interest rates by the end of 2016.
King’s concise wording gave way to Carney’s chains of clause and sub-clause, decorated with phrases that could only quicken a banker’s pulse, such as “explicit state-contingent forward guidance”.
Despite the complexity, Greetham from Fidelity said households would probably get Carney’s broad message of loose policy.
“King would not promise anything; Carney has promised three years of loose policy. So I think households will say, ‘We can plan in terms of buying a house or in terms of borrowing money on the basis of that.'” said Greetham.
Carney, who in his first month at the Bank has impressed staff as a hard working if sometimes demanding boss, said there was relief that Britain’s economy was recovering but cautioned that there should be little satisfaction.
Tanned and dressed in a delicately tailored blue-grey suit, he answered reporters’ questions with confidence, but also demonstrated some humility, frequently delegating answers to other members of the Monetary Policy Committee (MPC).
“A threshold plus three knockouts, on top of what we already have - I perfectly well understand the benefits, but the communication will be a challenge,” said Jens Larsen, a former Bank economist who now works at Royal Bank of Canada.
“This is the challenge for forward guidance - to make it clear to the general public. It’s too early to reach a judgement on that.”
Additional reporting by David Milliken