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Boris Johnson Should Accept Mark Carney's Rate-Cut Gift

Ferdinando Giugliano

(Bloomberg Opinion) -- Britain’s ruling Conservative Party has often accused Mark Carney of talking down the nation’s economy. The best Prime Minister Boris Johnson can hope for now is that the Bank of England governor follows up on his gloomy prognosticating by cutting interest rates at the BOE’s next meeting in January.

The U.K. is clearly in a tough spot, as growth falters and inflation slips well below the Bank’s target of 2%. The economy contracted by 0.3% in the month to November, following meager 0.1% increases in September and October. Consumer prices rose a mere 1.3% in the year to December, the lowest jump since 2016. Core inflation, a measure that strips out volatile items such as energy, also fell to 1.4%.

There are several reasons for this weakness. The global economy has had a difficult 2019, with the International Monetary Fund predicting the slowest rate of growth since the Great Recession. Trade tensions have been particularly hard on the European Union, the U.K.’s largest trading partner. On Wednesday, Germany reported growth of just 0.6% for 2019, the slowest rise in six years.

Britain’s domestic economy is also very uneven. The labor market has remained buoyant, as the unemployment rate stands at 3.8% and wage growth above 3%. This has supported consumption. Business investment has been a lot weaker, though. It was flat between the second and third quarter of last year, after a mere 0.1% increase in the second quarter. Brexit hasn’t happened quite yet, but the uncertainty of what shape it will take certainly has a cost.

These trends are unlikely to change any time soon. A tentative trade deal between China and the U.S. may remove the risk of an even greater trade conflict, but there are no signs that the global economy is headed for a sharp rebound. Johnson won a thumping parliamentary majority last month, which means Britain will split officially from the EU at the end of January. Yet there’s no clarity over what trade deal the Brits will strike with Brussels. Until that happens, animal spirits are unlikely to soar.

The BOE would be wise to cut rates from 0.75% to 0.5% when it meets at the end of January. Michael Saunders and Jonathan Haskel, two external members of its Monetary Policy Committee, have already voted for a cut. Carney, alongside Gertjan Vlieghe and Silvana Tenreyro, has hinted he might join in, which would secure a five-strong majority. A cut would be in line with the central bank’s mandate, which is to bring inflation back to 2% over the medium run. It would also reverse the terrible decision made by the BOE in mid-2018, when it raised rates while the clouds of Brexit were still hanging over Britain.

Johnson might be suspicious of a rate cut. After all, many Brexiters lambasted Carney for spreading a message of unnecessary misery and of pushing an anti-Brexit political agenda. A rate cut would be a clear sign that not all is well in Britain. This is inconsistent with the message of optimism Johnson is keen on sending.

However, the British prime minister may want to look for inspiration to his ally, Donald Trump. The U.S. president has been screaming for lower rates, even though the case for further easing by the Federal Reserve is debatable. Britain has a much more clear-cut need for help. At this juncture, the government could do with a bit of extra stimulus — even if it makes Johnson feel less chipper.

Carney will leave the BOE in mid-March, and be replaced by Andrew Bailey. A rate cut would be a generous parting gift to Britain after nearly seven years at the helm. In doing so, he would match his fellow superstar central banker, Mario Draghi, who spearheaded a sizeable stimulus package just as he was leaving the European Central Bank. For all the past acrimony, Johnson would be wise to accept this gift.

To contact the author of this story: Ferdinando Giugliano at fgiugliano@bloomberg.net

To contact the editor responsible for this story: James Boxell at jboxell@bloomberg.net

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Ferdinando Giugliano writes columns on European economics for Bloomberg Opinion. He is also an economics columnist for La Repubblica and was a member of the editorial board of the Financial Times.

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