Don't bet on interest rates rising this year

Mark Carney: Central bankers’ 15 minutes of fame are nearly over, but their influence won’t fade

Don't bet on interest rates rising this year

We're coming to the last seconds of central bankers' 15 minutes of fame."

I'm mildly jealous. It's a nice line. Not a great line, sure, but it sums up what's going on in the macroeconomic world pretty well.

Central banks are ceding centre stage to governments in the quest for stronger economic growth.

Still, for a man who claims to be happy to share the limelight with other players, Bank of England boss Mark Carney had a pretty big effect on the markets – and the pound in particular ...

The Bank was wrong on Brexit, but don't expect a change of policy

Last week we saw "Super Thursday". That term will be meaningless to anyone who doesn't have an unhealthy interest in, or a job that involves, knowing about UK economic data.

The Bank of England announced its latest decision on interest rates. It also printed its latest quarterly inflation report, the latest meeting minutes, and then rounded it all off with a press conference.

That's a whole load of market-moving material lumped into one big bundle – hence the "Super Thursday" nickname.

Now, let's have a quick reminder of the background to all this.

Before the EU referendum vote, the Bank of England was among those warning strenuously of how awful things would be if we voted to leave the EU. Regardless of when Brexit actually happened, economic activity would slow down, borrowing costs would rise, and everything would be bad.

As a result, the Bank pretty sharply cut interest rates from a 5,000-year low go 0.5%, to a fresh 5,000-year low of 0.25%. It also pumped a load more money into the economy via quantitative easing.

However, so far, it turns out that merely voting to leave the EU hasn't had much impact on the UK economy. You can come out with all the counterfactuals and excuses that you like, and you can argue that leaving will cause some pain (plenty of pro-Brexit economists think that'll be the case).

But so far, the UK economy has only been getting stronger, with lots of economic data surprising on the upside, rather than the downside.

To be fair, the Bank's Andy Haldane – who has an admirable tendency to speak freely in public, even when his views might have some of his colleagues chewing on their knuckle bones – admitted the Bank had suffered a 'Michael Fish' moment.

But I'm not sure his boss, Mr Carney, is on board with that take.

You see, in the lead up to last week's meeting, lots of analysts were starting to wonder about rate hikes. The economic data has been strong. Unemployment is low. Inflation is bound to go up this year because of the weak pound. The Sunday Times' economic commentator David Smith even argued that the Bank should raise rates this week.

And at the very least, most analysts – and the market – thought that Carney would start preparing the ground for rates to rise in the foreseeable future.

Forget about it. There might not be rate rises for years to come.

Shifting the goalposts yet again

The Bank did upgrade its expectations for growth, both for this year and next. But two main points jump out about the inflation report, says Kathleen Brooks of City Index. Firstly, the Bank didn't raise its inflation forecasts. It still expects inflation to peak at 2.8% in 2018. So it's no more worried about inflation than it was previously.

Secondly, it also cut its "equilibrium rate" for unemployment. The equilibrium rate is the rate at which the imbalance between the supply of workers and demand for them starts to drive up wages fast. The Bank's estimate used to be 7%. Then it fell to 5%. Now it's down to 4%-4.75% (unemployment is currently at 4.8%).

Apparently, the Monetary Policy Committee "now judges that the unemployment rate can probably fall a little further before wage pressures build significantly".

That's significant, because it's yet another shifting of the goalposts by the Bank. In short, nothing in the report suggested that the Bank sees any need to raise interest rates any time soon. And by that I mean years, not months. The market now doesn't expect rates to rise until 2019.

Carney even went out of his way to emphasise that policy could go in "either direction" depending on what happens.

So it's no wonder the pound took a hammering.

The big game plan is still inflation, inflation, inflation

I talked before about how it was business as usual for Janet Yellen – make sure rates remain well behind inflation. And it seems that we'll get the same policy in the UK.

Carney might be glad that central bankers' 15 minutes of fame are nearly over. But their influence isn't going to fade. Governments are relying on them to keep rates low while they decide on whatever forms of "fiscal stimulus" they might do. And once those programmes kick off (if they ever do), then they'll be relying on central banks to suppress rates the whole time.

It's as we've always said. The only way you escape from a debt trap sneakily – rather than by defaulting outright – is by inflating your way out.

Whether it's Trump or Clinton in charge; whether Britain is in the EU or not; whether France decides to quit the euro under Le Pen, or stand by her man with Macron/Fillon/whoever; the game plan is the same.

Suppress returns to savers. Keep debt as cheap as possible. Manipulate your currency lower when you can get away with it.

Invest accordingly, and you won't go far wrong.