Home > Bank of England, Monetary Policy > Rules, Not Discretion, Foster “Stability”

Rules, Not Discretion, Foster “Stability”

Imagine a policymaker, in whatever area of public policy, who acts in a random and unpredictable fashion.  One day they say one thing, the next day they say the complete opposite.  Would you expect this kind of policymaking to encourage “stability” in the way people act, in the way people behave in whatever area that policy covers?

Well, welcome to British monetary policy.

Carney gave a speech last night which created an instant swing in financial markets.  The FTSE 250 (a good indicator for UK domestic prospects) – is off about 2% this morning, though US markets fell late yesterday so we can’t blame the guvnor for all of that.

Carney and friends think that they can use the tools of macropru to create “financial stability”, whatever that means.  They are not even able to formulate and stick to a monetary policy rule which avoids creating “financial instability”.

That should be the simplest thing in the world.  2% IT.  5% NGDPLT.  Rules are simple.  Automatic.  Is the inflation forecast on target?  Below, we loosen; above, we tighten.  Is NGDP on target?  Likewise.

Oh, and the inflation forecast is not on target, by the way.  In the May inflation report the mean, median and mode projections of the CPI rate are below the MPC 2% target in every quarter of the forecast based on market interest rate expectations.  So it’s “obvious” we need tighter monetary policy, and of course central bank governors should go around giving hawkish messages about rate rises.  Governors who know exactly what they are doing, using words which have no doubt been chosen with extreme care, to express the right amount of “nuance”.

And here are four carefully chosen words to strike fear into your heart:

That is why an essential counterpart to our monetary stance is macroprudential vigilance and activism.

“Macroprudential vigilance and activism“?   Dear God.  Osborne, what monster have you created?

Update: Chris Giles also demonstrates the sharp movements in forward rates.  Be in no doubt this was a tightening of policy.


  1. james in london
    June 13, 2014 at 13:49

    Funnily enough, I am in doubt whether this was a montetary tightening. The markets aren’t always right.

    Carney’s May press conference comments were pretty strong stuff too, only dov’ish.

    I think that the Mansion House speech has switched from lauding the City’s success to banging on about the City’s supposed excess. The pre-speech leak about Osborne wanting to jail Libor and other fixers was in the same mould. Politicians, including Carney, have to be seen to be bashing bankers whenever they travelling east up Ludgate Hill.

    My betting is that Carney will go dov’ish again in a few weeks, perhaps at the next TUC Congress or CBI conference, when mixing safely with “good” manunfacturing workers and their bosses – and not a load of City boys.

  2. james in london
    June 13, 2014 at 16:55

    If markets were always right it would be very dull world. They are often wrong, that’s why they move. ;-)

    Carney is a politician first, and a CB guvor second. Spin matters to both. At all times.

  3. James
    June 13, 2014 at 23:16

    “The market reaction is the policy”, says Ryan Avent. That is good.

    I think the Fed in June 2013 (and the BoE now) are desperate to escape the zero bound and normalise policy, but they don’t want to tighten, either. The result is flip-flopping, as you say.

    • June 13, 2014 at 23:22

      “desperate to escape”… “but don’t want to tighten” that is a great way to put it. They don’t know how to do it. I was more optimistic we’d escape before the speeches, than I am now!

  4. James
    June 24, 2014 at 20:47

    Carney at the TSC today. What can you say? I was right he’d shift back. But you were right, the Mansion House comment was meant to be taken seriously.

    • June 24, 2014 at 23:02

      A good call, James. I would say that it is so blindingly obvious that the Governor is able to change UK monetary policy despite being in a so-called “liquidity trap”, it is shocking how much ink has been spilled on policy advice which assumes the opposite is true.

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