The optimism surrounding Mark Carney in the first few months of his governorhip has been like the hope that greets a new exotic foreign signing at a football club. We are not too sure who he his, but surely he must be good right?
And the general reception to the announcement of foward guidance has been positive. But how appropriate is this? There are some points that it is useful to remind ourselves of:
- the empirical evidence for a link between the policy of central banks and ultimate growth outcomes is at best inconclusive. There are lots of things that can happen to influence growth and many of these are beyond human control or foresight.
- economic growth itself does not tell you very much about where asset prices will go. Even if you were confident of what will happen to growth because central bank policy – history tells us that this is unlikely to translate into investment returns.
- the forward guidance announced it conditional – and conditional upon factors which the Bank of England has a very poor record of forecasting. How much faith can we put in the 2016 horizon? In Canada under Carney circumstances changed such that the central bank increased rates before it was expected.
So the answer to the question of how much we care about foreward guidance seems to be: not very much. That is unless market perceptions of policy cause unwarranted volatility in asset prices – that could offer some true bargains for investors in the summer transfer window.