Bloomberg is out with a great article speculating that Carney is bluffing in on rate hikes. The idea is that by talking about rate hikes, traders price in rising rates and without actually doing anything Carney has done a de facto tightening. Later, Carney can back away from his statements without having to flip-flop on rates.
The column refers to a great line from Mervyn King and his “Maradona Theory of Interest Rates”
He recalled how England had lost to Argentina in the 1986 World Cup in Mexico, after Maradona evaded five players on a 60-yard dash from his own half to score. “The truly remarkable thing, however, is that Maradona ran virtually in a straight line,” King said. Because the English defenders “expected Maradona to move either left or right, he was able to go straight on.”
Here’s the goal:
So the theory is by Carney faking “hike” it clears the way for him to go in a straight line.
To build the case, the columnist refers to Carney’s tenure at the Bank of Canada and a period in 2011 where the BOC adopted and then dropped a hawkish bias.
In May 2011, when he presided over a 1 percent interest rate cut as head of the Bank of Canada, Carney warned that “some of the considerable monetary policy stimulus currently in place will eventually be withdrawn.” In July of that year, his central bank dropped the word “eventually” from its statement on when rates would increase. By December, the bank was still saying “some modest withdrawal of monetary policy stimulus will likely be required.”
To some extent he’s right but it was never as clear as the column hints. The full line from the BOC was “To the extent that the expansion continues and the current material excess supply in the economy is gradually absorbed, some of the considerable monetary policy stimulus currently in place will be eventually withdrawn, consistent with achieving the 2 per cent inflation target. Such reduction would need to be carefully considered.”
In short, there were always qualifiers attached to the rate hike.
This is what Carney said at the annual Mansion House speech on June 12.
“There’s already great speculation about the exact timing of the first rate hike and this decision is becoming more balanced,” Carney said. “It could happen sooner than markets currently expect.”
Now that’s also not a clear promise but the MPC minutes also said it was “somewhat surprising” that markets were putting such a low probability of a hike this year. Add in comments from Weale, McCafferty and Miles and you have a lot more credibility on the line than Carney’s Bank of Canada ever put up.
Still, it’s food for thought on what is the most-intriguing central bank question (and trade) at the moment.