Carney’s football talk masks a transparency issue: Income targeting could solve it
SINCE joining the Bank of England last July, Mark Carney has been keen to talk a good game on central bank transparency.
He has even made a few fledgling steps in the right direction. Many of the interviews the governor gives are with regional media operations. A cynic might suggest that he prefers the softer questions fielded by reporters less used to quizzing the heads of central banks. But there has been a clear intensification of effort at the Bank to reach outside of London in order to get its message across.
When tasked with the mission of communicating some of monetary policy’s trickier nuances, Carney has fallen back on the one area on which he can be sure to capture the public’s attention: football.
The story of the UK’s economic recovery has been akin to the England squad making it through the qualifying rounds of the World Cup, Carney told us at last week’s Inflation Report press conference. This Sunday, the analogy was continued, as Carney expressed economics headwinds in terms of the sides England will face during this year’s group stages. We are in a tough group, according to the governor.
And while he might not want to admit it, the policies Carney has enacted since moving into Threadneedle Street have in some ways made understanding the recovery even harder. The somewhat arcane process of deciphering the intentions of the Monetary Policy Committee (MPC) seemed a little clearer for a moment last August. Forward guidance clarified that the Bank would consider a rate rise when unemployment fell below a given level.
But things were not to last. By February this year, the goalposts were moved again when the original version of guidance was swapped for the yardstick of spare capacity. That measure, the so-called output gap, was originally rejected by the Bank in August as being “unobservable and difficult to explain”. By its own admission, the Bank recognised that using slack as an indicator “would make it hard for the public to understand the guidance”.
Assessing the chance of a rate rise has again become a matter of watching the Bank’s internal politics for signs of disunity. The arrival of new MPC members this summer means that a majority on the committee will have served for less than a year, making the guessing game harder still.
It could all be much easier. Carney should turn back to an idea he floated in 2012 – nominal GDP targeting. The switch from an inflation targeting regime would be a radical step, but one with the support of a wealth of academics. Incomes would serve as a well-understood target, giving markets and the public much needed clarity. It’s an open goal should the Bank wish to take it.
Peter Spence is a liveblogger at Morning Wire