Central bankers can be an odd bunch. There has been something of a trend, over the past decade, for the senior jobs at what are, essentially, national cash managers to go to academics, rather than experienced bankers or market professionals – probably no bad thing, some would say, given the huge catastrophe that those same bankers recently caused. But it can mean that interpreting exactly what they say can be a bit tricky.
The UK is at something of a disadvantage here. Unlike in the US and the euro area, the Bank of England does not routinely publish statements alongside each interest rate meeting. While the Fed and ECB statements are largely predictable – I for one could probably write around two-thirds of Trichet's monthly statement well in advance – they do serve the incredibly useful purpose of giving a clear narrative to markets about what policymakers are thinking and what they are worried about.
The Bank of England, however, does things a little differently. There is often a statement when rates change, or when the MPC decided to resort to creating money. But the lack of a consistent, widely understood monthly statement means that BoE watchers are reduced to scrutinising members' public comments to try to piece together the overall thinking on the Committee.
This is probably one reason why the MPC's communication during the recession was a something of a shambles. Having nine independent members with nine different views means at least nine different stories – exhibit A here being the MPC's hopeless flip-flopping between the various different channels by which quantitative easing (QE) would affect the economy, which is part of the reason so many economists now question just how much impact it has had. (Despite continued protests from the BoE, the jury is still firmly out on this one.) But things are not made any easier when the Governor of the Bank then resorts to painful analogies about policy. So far, we have had disco-dancing, tennis and cricket puns – this week, the Governor tried driving.
The MPC, the Governor said, has its foot firmly on the accelerator. And the debate now is whether to push the pedal further towards the floor, or ease off and let the economy slow. The Governor, however, insisted that this was not a question of applying the brakes – it was a question of the appropriate degree of stimulus.
Unfortunately, this smacked of semantics that really do nothing to help central bank transparency. In the Governor's mind – and indeed most other economists, to be fair – the 'normal' or neutral level of interest rates is probably around 5 to 5Â½%. Logically, therefore, anything lower than that is providing a stimulus to the economy. Hence, Mervyn's statement that we would not get back to normal any time soon should be interpreted as a signal that rates will remain below 5% over the next three to four years, at least. Unfortunately, the Item Club had already told us that, and in far less tortuous fashion.
Mervyn's statement, therefore, in no way implies that interest rates will not rise from their current level of 0.5% soon. Andrew Sentance quite clearly already has the bit between his teeth, and I for one worry that Spencer Dale may not be far behind him. While there are obvious doves elsewhere – most notably Posen and Miles – they are not currently voting for more QE. So the balance of opinion could well shift more towards a rate rise.
Mervyn should have been much clearer. He should simply have said explicitly that interest rates could rise this year – monetary policy could be tightened. (That would be the wrong thing to do, but that's another column entirely.) In Mervyn's world, interest rates at 1% may just be 'less stimulus'. But it is still a policy tightening – and to ordinary people in the UK, it means higher mortgage costs and less money in their pockets. And, as anyone driving a car up a steep hill knows, easing back on the accelerator too soon runs the real risk of letting the car stall, or even go backwards. So let's stick to clear, unambiguous messages from now on: there is a real risk that interest rates could go up far sooner than they actually need to.