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Carney’s neglected macro variables

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Carney’s neglected macro variables

Britain has witnessed a few highs this week including consumer confidence and the sterling against the buck to complement the out-of-the-ordinary policy Mark Carney announced. Market expectations were further boosted by this announcement, as the steadily growing prices on the housing market continues.

A report on Friday showed a 2.6% increase in housing prices in July compared to the same time last year. Prices in London have a much higher growth rate with a 7.1% increase annually. Both these figures question the effectiveness of Carney’s low interest, large money supply policy in the long term. The purpose of this policy is to allow a progressive decrease in the unemployment rate to a target of 7% within a three year strategy, leaving out one important variable

The past 10+ years witnessed BoE monetary policy revolving around inflation targeting, as it was conventionally accepted to be the most effective means of policy. With the change of economic climates, these conventional wisdoms must be adapted accordingly. The question which asks itself, however, is how long can they afford to allow inflation to let loose?

Hypothetically, a large surge in exports would resolve the inflation issue, as the country’s economy would strengthen overall, making the hike in currency and housing affordable in real terms. Looking at Britain’s exports, higher education forms a considerable part of it where it is reported to be worth 17.5 billion to the economy on July 29th this year. “Overseas students make a huge contribution to Britain”, admits Vince Cable UK Business Secretary which is a rhetoric very different to the perspective on immigration revealed recently by the Tory government.

The department for Business, Education and Skills does have intentions to expand British exports of education as it announced its strategy to do so in the aforementioned report. This news was overshadowed, however, by news released at the same time on crackdowns on immigration. Will the efforts themselves also be overshadowed by the cancellation of the post-study work visa?

Overall, the figures show strong market expectations, and dangerously low figures for first time house buyers. With economic policy encouraging inflation and an unconvincing exports expanding strategy, is Britain setting itself up for a housing bubble?

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