Cheers, Mark Carney!

Governor Mark Carney

Mark Carney, governor of the Bank of England, announced that the central bank will not increase interbank interest rates unless unemployment falls to at least 7%. And that’s the right thing to do, too. It is the swiftest way to tell markets and the country that the institution he now leads worries more about economic growth than about inflation–which has been above 2% while UK’s GDP plunged.

No everybody seems happy with this first decision of Carney. Jeremy Warner, of The Daily Telegraph, reminded the governor that low interest rates punish savers and give way to short-lived recoveries, as interest rates go up again to cool off an unnaturally aided activity.

The argument about savings being unfairly punished escapes my understanding. Warner should know that saving is exactly what a stalled economy does not need; on the contrary, it is investment and consumption what is required to exit the crisis, so yes, we must stimulate spending, not saving. This goes not just for households, though, but also for companies. When corporates, for instance, sit on piles of cash they are diminishing the private sector’s overall investing ability.

Monetarists say saving isn’t excessive, the problem being its lack of use. Keynesians think otherwise and point out that what is saved isn’t consumed, which as a consequence affects all liquid assets. This is a more or less nonsensical discussion. The truth of the matter is that low investment or non investment is to be avoided if we want to return to growth.

Then, there is the claim that such recovery–on the back of attacking savers–would last little. There is nothing that can assure us that leaving the economy to its own devices, to rot limitlessly until finds its way back, will bring a stronger, long-term recovery. Of course, we must plan with long-term view for a sustainable economy, but there is nothing wrong in getting some help to climb the initial step. The alternative only fuels depression.

The economic cycle goes up and down, that is true. But after a terrible crash as the one we have suffered, following a crazy boom, amid staggering losses of capital and jobs, you would be deluded to believe that the economy will fix itself. Unless clear measures are implemented, confidence will not recover, either.

When an economy restarts, sales expectations increase and prices do so, too. That is a good thing to happen, because nominal interest rates will rise ahead of more profitable investments. Then, interbank interest rates will be pushed up, too. Let’s repeat it: this would be a good sign. Yields on investment and savings will rebalance themselves, and the financial market confidence recovers. It is then the time to watch out for bubbles–but we are very far from that stage.

Carney is right. He had to reassure the country that his mind will not be split between occupation and inflation. He has injected a necessary dose of optimism for the time being, and its waves will also refresh the Eurozone.

About the Author

Miguel Navascués
Miguel Navascués has worked as an economist at the Bank of Spain for 30 years, and focuses on international and monetary economics. He blogs in Spanish at: http://

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