Carney is governor of forward misguidance

Emma Ann Hughes

Emma Ann Hughes

The Bank of England’s decision to keep the base rate on hold came as a surprise to the markets.

Along with brokers, lenders and analysts, my mouth fell open in shock when it was announced that the monetary policy committee had voted to maintain the base rate at 0.5 per cent.

This shock intensified when I read the committee’s minutes.

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Just days ago Bank of England governor Mark Carney publicly stated that more monetary easing was on the table, including the possibility of action at the July meeting.

However on Thursday he voted to keep the base rate on hold.

This is another clear example of ‘forward misguidance’ from the governor.

The sort of misdirection that would get you financial advisers in a great deal of trouble, but makes him an amazing magician/governor - you can choose which.

Upon the news, Sterling raced higher in reaction, gaining 2.7 per cent on the session to reach a peak of $1.3470. It eased back, but by late yesterday (14 July) was still 1.5 per cent higher at $1.33.

But what prompted the decision to stick at 0.5 per cent this month?

The available evidence so far showed a weak housing market and reduced confidence.

One independent member, Gertjan Vlieghe, who had already been close to voting for a rate cut before the referendum, cast his ballot for an immediate cut of a quarter of a percentage point.

He justified his vote saying the early evidence suggested demand would weaken.

So why not cut the base rate now?

The committee stated they were waiting for more evidence of the negative impact of Brexit, despite noting the likelihood of a “significantly lower path for growth”.

Most members said they were minded to take action in their August meeting, in order to limit the economic damage stemming from the result of the EU referendum.

Given how Mr Carney made everyone think a base rate cut was coming this week, this remark about action in August may be viewed much more sceptically.

Ultimately though, the fact the base rate was held for the 88th month in a row can only be seen as a good thing.

Theresa May’s appointment as prime minister has already buoyed the markets and helped Sterling bounce back a little.

A base rate drop at this time would have indicated that the central bank thought we were undoubtedly headed toward recession, giving out further negative messages to the markets at a time when things have been rallying.

But don’t all breathe a sigh of relief just yet.

Just because the committee decided not to cut the base rate, does not mean the base rate drop will stay at 0.5 per cent in August.