Mark Carney confusing markets

Mark Carney, the Gov of the Bank of England, joined in a blaze of glory having been hand-picked by the UK authorities from Canada. He was seen as the next “big thing” in finance having helped to stabilise the Canadian economy with excellent management of interest rates and fiscal policies. Initially his tenure at the Bank of England started very well but his comments on interest rates of late are confusing property investors and the market as a whole.

Interest rates could go either way

While we all know the current economic situation is like nothing we have seen before, with Brexit and other issues in the background, markets and investors always look to the Bank of England for guidance. When the governor effectively makes an argument for increased interest rates and reducing interest rates this would seem to indicate the Bank of England is in the dark in the short-term. There are obviously a number of factors to take into consideration, some are yet to emerge, but sometimes it is better to say too little than to say too much?

Wage inflation

After a period during which wage inflation was effectively zero we are now starting to move back into more positive territory. At the moment wage inflation is under control although in real terms, after taking into account inflation, wages are struggling to maintain their value. Unemployment in the UK is currently around 4.5% and there is concern that this relatively low figure could prompt competition in the employment market and increase wage inflation. There is some scope before base rates would need to rise but this is perhaps the major concern of the Bank of England.

Economic performance

It would be wrong to suggest that the Bank of England is the only major institution which has got the UK economy wrong in the aftermath of Brexit. In light of Brexit the Bank of England cut forecast UK economic growth to 0.8% for 2017 and while this was revised upwards last year, it has been increased again up to 2%. Forecast growth for 2018 is around 1.6% rising to 1.7% in 2019 which would indicate the Bank of England is less concerned about the impact of Brexit in the short to medium term.

The only issue here is that a growing economy feeds inflation which, if towards the higher end of the spectrum, could prompt an increase in base rates to control spending. The likelihood is that over the next two years at least we will see volatility in economic growth forecasts although inflation should not really take off.

Hard Brexit

It is sometimes difficult to understand the difference between a hard Brexit, Brexit and a soft Brexit but campaigners on either side like talking “double Dutch”. If Brexit negotiations were to have a negative impact on the UK economy going forward, perhaps worse than many are forecasting today, we could find ourselves in a situation where UK base rates might fall further. Issues in the US, where Donald Trump is causing havoc, and further economic woes in Europe do not exactly bode well for the short to medium term?

As a consequence, uncertainty over the short to medium term performance of the UK economy and the direction of base rates could impact demand for UK property. However, on the positive side, overseas investment in UK property is set to continue to grow in 2017 and beyond with currency issues making UK property more attractive to overseas investors. So, on balance it is not difficult for Mark Carney to make a case for increasing, maintaining and reducing UK base rates. If the Bank of England has no idea, what hope is there for the rest of us?

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