As Mark Carney moves towards the end of his tenure as governor of the Bank of England, his final days have not been without controversy. Last week we saw the Bank of England MPC vote by a majority of 7-2 to maintain base rates at 0.75%. This was despite “direction” from the Bank of England in previous weeks to suggest that an interest rate reduction was on the cards. Indeed, the word from the Bank of England was that base rates were all but certain to fall. 

So, what changed and will Mark Carney go down as the man who cried wolf once too often? 

What changed the original advice? 

Interestingly, when the Bank of England announced that base rates would be maintained at 0.75% there were conflicting reports about the short to medium term direction of the UK economy. On one hand the bank acknowledged that business confidence had improved significantly since the general election (with more visibility regarding Brexit) but also issued a downbeat report for 2020, 2021 and 2022. It would appear that the Bank of England would have preferred to reduce UK base rates but the surprise increase in business confidence prevented this. 

UK economic forecasts 

When you consider that only last week the OECD suggested that the UK economy would be stronger than the EU economy in the short to medium term, why was the Bank of England so negative? Surely economic performance in the UK must be considered relative to the worldwide economy and in particular the EU economy. Not wholly unexpected, Bank of England economic growth forecasts have been downgraded for the UK. Current expectations now stand at 0.8% for 2020, 1.4% for 2021 and 1.7% for 2022. 

The UK government has certainly taken a more positive approach to the UK economy, going to great lengths to promote the potential benefits of Brexit. The Chancellor also announced ambitions to increase UK economic growth back towards the more traditional level of 2.7% to 2.8%. Whether he has been overambitious in the short term or the Bank of England is being overcautious only time will tell. However, from a business point of view surely it is better to focus on the positives, while also appreciating the downside, than vice versa? 

The man who cried wolf once too often 

When Mark Carney was appointed governor of the Bank of England back in 2013 he came with a reputation second to none after holding a similar role in Canada. His reputation certainly came before him and he demanded the respect of financial markets, investors and politicians. Unfortunately, if you look back on his time as governor of the Bank of England this is just the latest in a number of potentially damaging U-turns for the Bank of England’s reputation. 

Whether describing him as the “man who cried wolf too often” is a little unfair, there is no doubt that the reputation of Bank of England guidance has not been enhanced over the last seven years. There was also an issue with the Bank of England’s live conference feed which had apparently been intercepted by a third party allowing access to information just a few seconds before the wider market. In reality this was not a problem created by the Bank of England but it was headline news and not exactly reputation building.

 UK property market going forward 

There are a number of issues to take into consideration with regards to UK property prices in the short to medium term. The lifting of the political impasse towards the end of 2019 and greater direction on Brexit has helped overall confidence in the UK and in particular the property market. While there is some discussion as to whether UK base rates may go lower in the short term it is highly unlikely they will rise for the foreseeable future. Therefore cheap finance will likely continue for some time to come, offering a significant degree of support to the UK property market. 

While some people are sceptical, employment numbers in the UK are near an all-time high and when you also factor in the ever increasing shortfall in newbuilds, demand for property is likely to continue with supply floundering. There is also the red herring suggestion that EU migration to the UK will suddenly stop at the end of 2020 when this is not the case. Instead, as things stand, those looking to move to the UK from the EU will simply go through a process currently undertaken by non-EU nationals. Indeed, if the OECD is correct and the UK economy turns out to be stronger than the EU economy in the short to medium term, might this encourage more migration to the UK? 

Summary 

There is no doubt that financial markets do still listen to Bank of England guidance in relation to interest rates and economic performance. Whether or not this reputation has been tarnished somewhat as a consequence of recent U-turns and confusing signals is certainly a matter for debate. Mark Carney is coming towards the end of his tenure as governor of the Bank of England and while he joined with an impeccable CV, is he leaving with his reputation fully intact?

 

 

 

 

 

 

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