Just as Brazil and Croatia’s football teams were mumbling their respective national anthems last night, Bank of England governor Mark Carney was limbering up to make one of the most politically sensitive speeches of his career.
The Bank of England governor was the follow-up act to George Osborne at the chancellor’s annual Mansion House appearance. Osborne had talked about giving the Bank more powers to regulate the housing market (which caused all the housebuilders’ shares to plummet this morning - Berkeley Group was down by almost 5% in mid-morning trading, as was Taylor Wimpey).
But Carney’s response to Osborne was far more important. Particularly the bit where he said that ‘the need for internal balance - to use up wasteful spare capacity [in the economy] while achieving the inflation target - will likely require gradual and limited interest rate increases as the expansion progresses. The start of that journey is coming nearer’.
Markets took that to mean ‘we’re going to raise rates earlier than spring 2015, which is what you were all expecting’ and, basically, went berserk. In the early hours of this morning, sterling hit 1.6981 against the dollar, and 1.2522 against the euro. The last time it was this high against the euro was at the end of last year. Against the dollar, it’s now close to a five-year high.
This is the first hawkish (‘one who favours high interest rates’) comment Carney has made since he took the job as Bank governor almost a year ago. The chancellor has hinted that instead of raising rates, he might like to use mortgage market cooling measures - like pressuring banks to cap the amount people can borrow versus their salaries - instead. But Carney seems pretty set on rates.
‘Macroprudential policy is not a substitute for monetary policy. If it is used for insurance it won’t necessarily affect the path of interest rate increases,’ he said.
For Osborne, that’s going to present a bit of a problem: if the Bank raises rates early next year, that’s not going to reflect brilliantly on the government just as it launches its election campaign. And Labour leader Ed Miliband is very focused on the ‘cost of living crisis’.
Until now, Mark Carney has been Osborne’s golden boy. This could be the moment he and the government part philosophical ways.