Bank of England governor Mark Carney’s speech today has implications for the travel market. Ian Taylor explains
The growing likelihood of Western intervention in Syria, following the apparent poison-gas attack by the government in Damascus, raises risks that are difficult to contemplate.
For a start, it risks embroiling neighbours Lebanon, Israel and Turkey, with consequences none can foresee.
Security concerns at airports are bound to heighten. An impact on the oil price – which rose to $114 a barrel yesterday – is already evident.
But we can merely look on as events unfold. Consider, instead, a lesser event that will help shape the environment for travel over the coming days.
In a scheduled speech today Bank of England governor Mark Carney will make a second stab at explaining the new ‘forward policy guidance’ of the Bank and its monetary policy committee (MPC).
The pound recorded its biggest weekly slide against the euro since May in market anticipation of the speech, despite official figures showing UK GDP grew 0.7% in the second quarter of the year.
When Carney spoke earlier this month he declared “a renewed recovery underway”, but noted: “This is the slowest recovery on record.”
At the same time he sought to reassure the markets by issuing ‘guidance’ on the Bank’s intention not to raise interest rates before 2016 – meaning everyone can relax about the cost of borrowing (unless they are savers).
Carney is attempting to maintain financial stability while he winds up two unprecedented central bank policies: the 0.5% Bank Rate and Quantitative Easing.
These policies will remain in place until unemployment falls from the current 7.8% to 7%. The committee does not expect that until 2016. It will only think again if there is a threat of higher inflation or an asset bubble.
The Financial Times (FT) pointed out: “Guidance is not risk-free. . . [it] seems to buy stability when deployed at the cost of greater volatility later. . . The promise that rates will stay low may be impossible to keep.”
In any case, the cost of borrowing for homeowners and businesses reflects market rates not the central bank rate and these are already pushing up mortgage and other lending costs – leaving households with less disposable cash.
More important – and the reason for intense interest in today’s speech – the FT noted “market scepticism” and a belief “the committee will fail to keep interest rates on hold for another three years”.
It suggested: “Market interest rates imply the MPC will raise rates in the summer of 2015.”
The scepticism is due to a number of factors. One is the get-out clauses. The Bank will abandon its guidance (or modify it) if inflation appears set to remain above target (it has consistently since 2009) or financial stability is threatened (how likely is that?).
Inflation “is viewed by many as the knockout most likely to be breached”, according to the FT. But who would rule out the bursting of a fresh housing bubble courtesy of the buy-to-let boom fuelled by the government’s mortgage-lending guarantee?
A second factor is the Bank’s unemployment measure. The FT reports: “Some economists think unemployment will fall to 7% far faster than the MPC expects.”
The upshot will be intense scrutiny of the unemployment figures each month.
A sharp fall in the jobless is likely to trigger a run on the markets. There will be speculation on an earlier-than-expected rate rise ahead of employment-figure announcements and so on.
Carney has already attempted to hedge on this, describing the 7% figure as merely a “way station” not a trigger for rate increases.
There is a further problem. The FT reported: “The full effect of MPC decisions take 18-24 months to feed through to the economy.” The August labour force figures were for the three months to May.
So there is a delay in producing the data that will be used to set the base interest rate over the next three years, and an 18-24-month delay in assessing the impact of a decision based on those figures.
At all times those setting the economic rules for the road ahead will be driving with eyes on the rear-view mirror.
Carney’s speech will be all about placating fear. Meantime, the emerging markets – and that means three of the four BRIC economies (Brazil, Russia, India) – are on the cusp of financial crises.
The Eurozone will see fresh bail-outs (starting with Greece) as soon as the German election is out of the way on September 22.
It is not going to be a comfortable autumn – and that includes for travel.