Russell Lynch: Carney will speak daggers but use none on rates

The list of the requirements of the new Governor of the Bank of England, whoever he or she may be, is a lengthy one. It includes the ability to “communicate with authority and credibility” to financial markets, the press and the public at large, as well as the wherewithal to “make decisions in a timely manner against a background of uncertainty”.

Those attributes will be given a severe test tomorrow. Mark Carney’s task will be to explain convincingly the passivity of the Bank’s rate-setting monetary policy committee against a backdrop of steadily improving economic news, in the Bank’s quarterly inflation report.

In response to the classic “hawk or dove” question usually faced by any MPC member, many dodge the question by saying they’re driven by the data. But much of that data clearly isn’t consistent with rates at the emergency level of 0.75%.

A quick sweep throws up solid advances in pay packets ahead of inflation, buoyant retail sales and overall economic growth for the first quarter which could come in much stronger than the Bank’s latest 0.3% forecast: it’s already raised that once since the February forecasts. The Bank’s 2019 forecast of 1.2%, made in February, also looks too low compared with the City consensus and other bodies’. The jobs market appears strong and at just 3.9%, unemployment remains below the Bank’s estimate of the “equilibrium” point to which the jobless rate can fall without fuelling rising inflation, another red light.

Even more hawkish ammo comes from the UK’s still-poor productivity performance. Even if the economy did manage 0.5% GDP growth, average hours worked are up 1.2%. That means labour costs per widget of output are rising; the latest figures show the biggest jump in unit labour costs for more than five years at the end of 2013.

That will be ringing alarms among the more activist members of the MPC like Michael Saunders. Admittedly not all the news has been so hike-friendly. Businesses are more cautious on investment, the housing market isn’t doing anything much and the more up-to-date purchasing manager surveys have been sluggish.

But on balance you’d certainly be expecting the financial markets to be placing a bigger chance of a rate hike in 2019 than the one-in-four shot it makes such a move this year. The Brexit timebomb has been defused until October 31, but one of the few things of clarity that emerged from the Westminster chaos of the pre-Easter period is that there is no majority for a no-deal Brexit.

Hence, unless it happens by accident — not impossible — the Bank’s assumption of an orderly Brexit looks sound, and seems less of a barrier to raising rates. So what does Carney do? What the Bank fears, but cannot say, is that it doesn’t want to be tightening policy in a summer of potential political madness, including the threat of a general election and a new prime minister.

Instead we’ll hear a lot of “wait and see”, for example on whether Brexit stockpiles artificially inflated growth. Expect much fretting as well over a slowing international picture.

It’s a balancing act between sounding hawkish enough to impress the markets and lying low until the political weather becomes clearer; it might even be helpful for the Bank’s credentials if one or two MPC members did dissent.

As a certain Danish prince put it, the Governor is likely to “speak daggers, but use none”.