Zak Mir – The Empty Promise Of Forward Guidance

The problem with the markets, is that it is usually at precisely the point when most commentators and traders are in sync, that they are most likely to have got it wrong. For instance, the joy which accompanied the Bank of England receiving its independence in 1997 was totally inappropriate given the way that over the following 10 years the seeds were sowed for the Great UK Banking Collapse of 2007 -8.

Of course, 2007/8 was the time when we were treated to the Keynes inspired “Too Big To Fail” banking bailouts, and which incidentally, no one voted for on either side of the Atlantic but which just appeared out of the ether. Now, we have apparently seen this strategy (which rewarded failure with salvation) as we run upto the “re-privatisations” of the “Too Big To Fail” brigade such as Lloyds (LLOY) bear fruit.  It begs the question though – why is Lloyds back in such a strong position? Lending at 3% plus over the base rate, and offering next to nothing on deposits might give you a clue… This rip off continues with remarkably little protest, and is underpinned by the Bank of England.

We now have the latest hot phrase from the Bank of England, one that Mark Carney has brought over from his last job in Canadaq – so called “Forward Guidance”. This is defined as a promise made by a central bank to maintain interest rate policy at a certain level – currently ultra low, for an extended period. On the face of it, the purpose of this promise is to prevent uncertainty and distress in the financial markets and especially for borrowers. This is in contrast to the bad old days when, in theory, you did not know what might happen from one day to the next. But how ridiculous this concept is. How can a central bank make a promise any further forward than what its members may be having for breakfast tomorrow?!

Forward Guidance in fact seems to be an invention originating from Alice In Wonderland as it implies that even if bonds collapse and yields soar or there is a war with North Korea or even George W. Bush gets re-elected President for life that interest rates will remain at ultra low levels. It is ridiculous, and a prime example of the worst aspect of  QE /ZIRP / punch bowl  economics. It has also created the equivalent of a dependency culture in the financial markets and likely means that after 5 years of the punch bowl, the markets have the authorities over a barrel – probably the reason that our esteemed former editor Mr Richard Jennings has been calling the end of the world on stocks in recent weeks.

But, I would go further in saying how lame this offering from Mark Carney is. Did we really pay £800,000 to this Canadian overachiever in order for him to ring round the ECB and Fed to get the Forward Guidance / Empty Promise policy idea in which rates are tied to unemployment falling below 7%?  Indeed, this is all pretty cute when one is looking at an environment which, after the financial crisis, has been generally acknowledged  as being a sanguine and jobless recovery.  

Of course, we wish Mr Carney well with his strategy, but really the fact that we are getting all the UK economic recovery headlines at the moment would suggest that Forward Guidance as a euphemism for keeping near zero rates – and something which is now already well past its sell by date. It is difficult to believe that when the other end of the cycle eventually arrives (which it will), there will be much goodwill derived from keeping interest rates at say, 10% with, for good measure,  an assurance for savers! In the meantime, even if the Bank of England does not raise its interest rates –cynics would say to continue to boost the banks Lloyds and RBS (RBS) and their long repairation process; mortgage and credit rates will rise anyway on the money markets. You can’t buck the markets!