“Five years and more since the successive collapse of the pillars of the American financial system ushered in our present dire ‘unorthodoxy’, it should be obvious that overabundant money is no substitute for a lack of genuine capital. It should also be readily admitted that artificially low interest rates cannot be guaranteed to overcome the many disincentives to entrepreneurship which currently exist. How else could it be in a world where the profit motive is so universally condemned? How else when any businessman worth his salt knows that he is being asked to spend his energies and pledge his future well-being in pursuit of customers who either themselves are not financially sound or who suffer under a government whose own straitened condition may, at any moment, seek to rob them of whatever wealth they have so far managed to preserve.”
Sean Corrigan, No zero bound on reason
Commentary & Analysis
Pound Powers Higher on Carney Quicksand
Bank of England Governor Mark Carney had some good words to say about UK growth prospects; currency traders seem to love the news. But I thought the best part was this headline by Reuters’ reporter George Hay:
BOE’s Carney Artfully Retreats – Into Quicksand
The lead paragraph:
LONDON, Feb 12 (Reuters Breakingviews) – Mark Carney has artfully retreated. On Feb. 12 the Bank of England governor faced the tricky task of explaining why his forward guidance policy, which has ostensibly failed, is actually a big success; and why an increase in his own GDP growth assumptions, which should imply rate cuts sooner than later, actually doesn’t. His workaround may just leave him in economic quicksand.
All clear now? I was going to say it’s clear as mud; but the operative word is quicksand evidently.
With a degree of brass neck, Carney now claims growing GDP and falling inflation show forward guidance works. But the BoE’s already ropey reputation for forecasting competence has taken a knock. And, by upgrading the central bank’s forecast for GDP in 2014 from 2.8 percent to 3.4 percent, the BoE is almost inviting investors and businesses to assume a rate hike even sooner than the second quarter of 2015 that markets expect.
Brass neck? You got to love that. A brass neck is likely heavy, which would make quicksand that much more dangerous.
But to Mr. Carney’s concerns, he did mention exports and spare capacity in the UK economy (a concern for all developed economies at the moment it seems). The criticism of Carney seems to rest on the view the UK is entering a standard cyclical recovery that will include rising inflation and wages and the like. But maybe Mr. Carney is concerned about the “new abnormal,” our summary of what that entails is below:
Carney is quite concerned about the UK current account problem and overall UK competitiveness going forward. The current account is already deep into quicksand it seems:
And though GDP growth has been upgraded by the BOE, the UK has lagged the crowd since the crisis:
But from a currency perspective what seems to matter is yield differential, as usual. And the differential (2-yr benchmark UK-US) in favor of the pound is on the rise and GBP/USD is too:
Some questions: Will Carney’s concerns be validated or is the BOE really behind the curve which is suggested by rising relative market rates and the enthusiam of traders today? And how much does a rising UK currency weigh on the current account—brass neck-like, so to speak?
Technically, I have been viewing this move higher in the pound agianst the dollar as “corrective,” and been burned trying to pick the top this week. The pound loves to put in “double tops” on the chart; another may be in the works.