Governor's Forecasts Prove Wide Of The Mark

Poor old Mark Carney. In many senses the Bank of England Governor had a dream start to his job.

When he came into office, unemployment was close to 8% and looked stuck there; now it is barely above 5% and may drop even more.

The economy was barely recovering from a double dip; it recently clocked in its fastest period of growth since the crisis. And the longest squeeze on household incomes in history came to a decided end under his aegis.

:: Bank Could Cut Rates Amid Growth Fears

Mr Carney's problem is that every time he makes a big forecast he seems to get it wrong.

When he came into office, the Governor brought with him a whizzy new framework for setting UK interest rates. Under "forward guidance", he would provide clarity about borrowing costs.

He promised, based on the Bank's forecasts, that he and the Monetary Policy Committee would start to consider lifting them only when unemployment dropped beneath 7%.

Suddenly, within a few months, the jobless rate, hitherto stuck stubbornly above that level, started to come down. Within a year, forward guidance had to be dropped, replaced with a far more vague set of promises some nicknamed "fuzzy guidance".

Not to be deterred, Mr Carney started to drop hints about when the first rise in rates would come. In a speech at the Mansion House in 2014 he signalled that rates would go up sooner than markets expected (which meant within a year). That was wrong.

Last summer he predicted the decision to raise rates would come into sharper relief "at the turn of the year". That was wrong. Well, unless you're being very literal indeed and think it could also entail not raising rates.

The one prediction he has stuck to that had, up until now, looked pretty uncontroversial was that the next move in rates would be up rather than down. But, in the past few weeks even that has now come into question.

Investors in the money market are now putting a greater probability on the next move being down than up. There is a 30% chance of a cut, according to their projections.

Such forecasts may prove to be wide of the mark. Today the Bank's Inflation Report did indeed cut growth forecasts and inflation forecasts, which shifts the likely date of the first increase some way off.

However, the report also said that spare capacity (essentially the amount of room the economy had to grow without getting inflationary) had fallen; when spare capacity gets to zero is normally the moment a central bank tightens policy.

Either way, the likelihood of a rate rise any time soon seems to be receding into the distance. Currently markets are not pricing in the first increase in borrowing costs until August 2018 - a couple of months after Mr Carney’s initial term as Governor comes to an end.

Were that to happen, and were Mr Carney to leave as planned then (there is speculation he may extend his term) that would make him the first Governor since Lord Catto in the 1940s to serve out a full term without ever changing monetary policy.

An achievement, certainly. But not the one he forecast.