Can Mark Carney believe his luck? Overnight, it would appear, and simultaneous with his assumption of the Governor’s chair at the Bank of England, the UK economy has turned around.

It seems only a couple of months ago media commentators were speculating about the possibility of a triple-dip recession.

Now, even the second dip has been revised away by those careless statisticians in the Office for National Statistics. What is more, as we travel towards the end of the year, inflation will fall back, and stronger economic growth will show through in better numbers for government finances. Clearly, Carney should be brought to the attention of the Vatican.

Meanwhile, spare a thought for the out-going Governor; Baron King of Lothbury. He appears to have packed his briefcase for the last time, and taken all the bad news with him. That’s life.

Of course, the about-turn has not been as abrupt as newspaper headlines would have us believe.

Forward guidance

With the benefit of greater hindsight, we will see the improvement in conditions beginning to emerge in 2012.

It would also appear Carney’s first policy statement has been widely applauded.
His decision to commit the Monetary Policy Committee to maintaining interest rates at their currently exceptionally low levels until unemployment falls to 7% was regarded as helping provide policy certainty.

It is assumed this will help the recovery, as the Bank of England’s projections for unemployment suggest a likelihood that the period of a 0.5% bank rate will last until mid-2016.

Unless, that is, the Monetary Policy Committee takes the view that, on an 18- to 24-month horizon, inflation will be half a percentage point or more above the 2% target.

Policymakers always act with the best of intentions, and from where we sit today, it would seem there is little danger in pledging to a prolonged period of easy money. However, we should always beware of the law of unintended consequences.

Housing market

It is encouraging we are beginning to see activity, particularly turnover levels, picking up in the housing market. But buyers are now being attracted into the market by very low mortgage rates.

What we have to consider is the impact on such borrowers when money costs start to rise, and fixed rate agreements begin to lapse.

Whenever economic policy moves to an extreme, it prompts actions that would not be undertaken in a more normal policy environment.

Thus, there is a severe risk borrowers will take on debt that will turn out to be extremely onerous when rates do begin to normalise.

The reason the UK recession was so deep was the household sector had previously got itself into dire financial straits – encouraged, it may be added, by a protracted period of below-normal interest rates.

Debt-to-income levels rose to unprecedented highs, leaving borrowers massively squeezed when interest rates rose, and again when real incomes were eroded by persistently high inflation.

It would seem bizarre, therefore, that almost by definition one of the measures of success of current policy will be a renewed increase in the debt-to-income ratio.

It would be easier to defend the government’s commitment to make more mortgage finance available to households were this to be at sensible interest rates.

Sadly, we have in the making, at least for a proportion of households, the next credit crunch.

Changing conditions

Philosophically, it seems wrong to commit to a policy course over an extended period when we have only a vague understanding of how conditions will change over that period (and we should remember the Bank of England’s record for economic forecasting is atrocious).

Indeed, while it is generally deemed transparency is a good thing, it can often be the case in the area of economics and finance that transparency interferes with and has a negative impact on decision-making.

Uncertainty and risk are important in ensuring decisions are reached that build in protection against the unexpected.

My concern is it may turn out that, rather than helping the credit markets recover with a new form of policy treatment, Carney is administering snake oil.

Richard Jeffrey is CIO of Cazenove Capital Management