Markets bet against Mark Carney's forward guidance
Thu 05 Sep 2013
AS Britain basks in the glow of a series of positive economic reports, investors have become so confident that they believe interest rates will rise almost two years earlier than governor Mark Carney indicated last month. Market interest rate expectations suggest the Bank of England's monetary policy committee will disregard Carney's "forward guidance" and raise the 0.5 per cent rate in the final months of 2014 or the beginning of 2015 rather than at the end of 2016. ? A string of good news, including record growth in the manufacturing and service sectors, has fuelled confidence in Britain's economic recovery. Market interest rates rose sharply yesterday and the yield on ten-year government bonds jumped above 3 per cent for the first time since July 2011. ? According to the Financial Times, the MPC's failure to comment on the expectations of earlier interest rate rises has only added fuel to the rumours. In July, the MPC said speculation of an earlier rise was "unwarranted", but after yesterday's interest rate meeting it declined a request to repeat the statement. ? Mike Amey, head of sterling portfolios at the bond giant Pimco, told The Times: "In deciding not to issue a statement today, the Bank has signalled it doesnt believe the recent rise in wholesale interest rates is sufficient to derail the recovery." ? The market is now pricing in a rate hike by the end of next year. That is pretty aggressive after all, the current run of stronger economic data comes after five years of bad data," he added. "I would personally be surprised if rates rose this side of the next election." ? The FT reports that while David Cameron and George Osborne, currently in Russia for the G20 summit, are congratulating themselves on Britains optimistic economic outlook, they are aware that the recovery will not happen overnight. Although the OECD increased Britains growth forecast for the end of 2013 from 0.8 per cent to 1.5 per cent, Osborne warned: We are still in the early stages of recovery. We still have great economic challenges.
Carney under pressure over rates as recovery gathers pace? 02/09/2013 THE NEW Governor of the Bank of England, Mark Carney, faces a growing struggle to rein in market expectations of a rise in interest rates, according to the Daily Telegraph.
In his policy of "forward guidance", announced last month, Carney said that interest rates would remain at 0.5 per cent until unemployment drops to seven per cent. The Bank of England predicted that this would not happen until at least mid-2016.
However, strong economic indicators, including a buoyant property market, are piling pressure on the new governor to convince markets that interest rates should stay low for the next two years.
Traders continue to bet that rates will rise in 2015, suggesting they think unemployment will drop to the seven per cent threshold sooner than predicted.
Manufacturers are said to be enjoying a "surge" in activity with output rising to a three-year high, while Britains property market is enjoying its best conditions since before the financial crisis. Analyst Hometrack reports that house prices are growing at their fastest rate in three years. Accordingly, accountants BDO found a 20 per cent rise in homeware sales for retailers in August.
"If the recovery does gather momentum in the UK, events may force the hand of Mark Carney and the MPC, causing interest rates to rise sooner rather than later," says Andrew Sentance, a former member of the Monetary Policy Committee (MPC).
Carney is not expected to change the policy at his monthly meeting with the MPC this week. However, the Telegraph says the Bank may put out another statement to reinforce its intentions to keep rates low.
City economist Gerard Lyons said yesterday that "forward guidance is feeding a housing bubble in London and may [be] resurrecting leverage and parts of the shadow banking world as well". But he added that critics of the guidance appear to be overlooking the fact that the economy remains weak.
Mark Carney vows to act amid fears of house price bubble
BANK OF ENGLAND governor Mark Carney insists he will "personally" step in to ward off the threat of a housing bubble generated by low interest rates and the Governments Help to Buy scheme.
In an interview with the Daily Mail, the Canadian said he knew how much house-price fluctuations could affect the economy, having lived in the UK in the late 1980s and 1990s. "I saw the boom-bust cycle in the housing sector, the damage it can do, the length of time it took to repair," he said. "I'm very alert personally to this issue."
House prices have risen by 3.5 per cent in the past year, according to Nationwide Building Society, and prices climbed 1.4 per cent in the three months to August. The Mail says there has been a 6.4 per cent jump in the cost of a home in London in the last 12 months.
The Bank of England itself revealed today that mortgage approvals were at their highest rate since March 2008, prompting what the FT called "speculation of a fresh house-price bubble".
It says the news comes as "concern mounts that government policies, such as the Help to Buy scheme unveiled by Chancellor George Osborne in March, are inflating a house-price bubble."
However, Carney insists that the Bank is watching prices closely, and he told the Mail: "We will, as appropriate, make our views known in terms of the degree of this risk and the potential action that should be taken to address it."
He even issued what the Mail called a "veiled warning" to Chancellor George Osborne, stating that seeing off a bubble would be a "challenging task", especially "if there were a host of government policies or other events that are pushing in the other direction".
Carney explained that there was now a "toolkit" at the Bank of England's disposal that could be used to try and stop any bubble forming. It can restrict mortgage credit and even raise the amount of capital that banks and building societies must hold so there is less available for home loans.
Mark Carney: Recovery 'taking hold', but it's 'measured'
MARK CARNEY has some good news and some bad news for those anxiously watching the UK economy for signs of recovery. A "renewed recovery is taking hold," the Bank of England's new governor told business leaders in Nottingham today, but it will be "measured rather than rapid".
Carney's forward guidance policy, a document released earlier this month, tried to convince financiers in the City of London that interest rates would remain at 0.5 per cent, an historic low, for the next three years. Unfortunately for the BoE chief, traders interpreted a series of caveats in the document as evidence rates might rise sooner than expected. Bond yields jumped as a result.
Today's speech, the governor's first public address in the UK, has been interpreted as an attempt to "go over the heads of City analysts and talk directly to the decision makers in the real economy about what forward guidance means,"? The Guardian reports.
Carney told his audience that interest rates would stay low at least until the UK's unemployment rate fell to seven per cent. The chances of joblessness hitting that rate by mid-2015 were only "one-in-three".
In any case, Carney said, the seven per cent milestone was not a guarantee rates would rise. It was simply a "staging post to assess the economy" and nobody should assume it was a "trigger" for a rate hike.
The BBC points out that Carney has previously said it would take about three years and the creation of 750,000 jobs for the jobless rate to fall from its current level of 7.8 per cent to the seven per cent threshold. But in today's speech he warned that the economic recovery would not necessarily go hand-in-hand with faster job creation and lower unemployment.
"There is certainly scope for the economy to grow through an increase in output per hour worked rather than new job creation," he said.
Carney guidance could prompt a recovery based on debt
Doubts over Carney's 'forward guidance': will Bank turn to QE?
AS MORE doubts are raised about Mark Carney's promise to keep the bank rate at 0.5 per cent unti unemployment drops to seven per cent, observers claim he may have to revert to 'quantitative easing' to keep the rate down.
Carney's announcement, made last week under his new 'forward guidance' policy, was intended to reassure borrowers and encourage growth. But his promise has "failed to sway the market", reports the Daily Telegraph.
Traders and economists have been pushing up the rate at which the government can borrow with yesterday's strong jobs numbers casting further doubt on Carney's timetable, which was based on an estimate of unemployment not hitting seven per cent until 2016.
The overall unemployment rate for the second quarter remained at 7.8 per cent. But analysts seized on the number of people on unemployment benefits, which dropped by 29,200 between June and July to 1.44 million, the lowest number in more than four years. This could mean the overall unemployment rate could soon start to fall sharply, way before 2016.
Meanwhile, minutes from the last Monetary Policy Committee show that not all members agree with Carney or back his 'forward guidance' policy.
Carney said the link between interest rates and unemployment would be overridden if any one of three caveats known as "knockouts" come into force. One caveat is if inflation threatens to rise above 2.5 per cent in 18 to 24 months' time.
But the minutes revealed that one member, Martin Weale, voiced concerns that such a long timescale could dent confidence in the Bank's commitment to stable prices.
"The fact that one MPC member was openly concerned about the risk of rising inflation expectations and wanted a shorter knockout trigger may well further fuel market suspicion that the Bank will raise interest rates before mid-2016," said Howard Archer, chief UK economist at IHS Global Insight.
Nick Beecroft, a senior market analyst at Saxo Capital Markets, told the Financial Times: "Forward guidance is hardly worth the paper it's written on. What does it add to the party? I'm afraid rates will be rising long before mid-2016."
The MPC minutes also revealed that QE is still on the table. The Bank of England is believed to be waiting to see if markets fall into line with its guidance by the end of the summer before deciding its next move.
Carney guidance could prompt a recovery based on debt
THE INTRODUCTION of 'forward guidance' on interest rates by new Bank of England governor Mark Carney generated a mixed response yesterday, with markets reacting unexpectedly and observers undecided on the benefits.
Carney announced that interest rates would remain at their record low of 0.5 per cent until 2016 unless the unemployment rate drops below seven per cent, although he also installed several get-out clauses in the announcement.
There was a "confused response" on the financial markets, said The Independent, with gilt yields jumping and shares falling because traders were "underwhelmed" by the news.
The announcement is good news for borrowers. "Homeowners are expected to benefit from at least another three years of rock-bottom interest rates," says The Times. "Lenders will come under pressure to cut mortgage rates even further."
But it's not so good for savers, adds the paper. They now face having their nest-eggs "eroded by three more years of low returns and high inflation".
The risk of inflation is a genuine one. The Guardian explains that by pledging to keep interest rates at rock bottom Carney was "obviously seeking to present himself as more concerned about growth and the labour market in particular than inflation."
It warns that it could lead to pressure not just on savers and pensioners, but also workers as real wages will be eroded by inflation. What's more low interest rates could also encourage people to borrow more, warns the paper. "What lies ahead is a recovery built on credit and house prices. Sound familiar?"
The Institue of Economic Affairs made its reservations clear and said the pledge was the "most dangerous development in UK monetary policy since the late 1980s".? It said it threatened the independence of the Bank of England and added: "Monetary policy should be designed to ensure that we have stable prices."
But not everyone thinks 'forward guidance' represents much of a change. "In some respects it merely makes explicit what the Bank has been doing in practice since the crisis began," says Jeremy Warner in the Daily Telegraph.
He adds that the introduction of other "knockout" clauses that will allow him to alter interest rates means Carney has "given himself so much wriggle room as to make the commitment seem meaningless".
Politically, George Osbone's request for forward guidance from Carney could be a masterstroke, says Patrick Wintour in The Guardian, who explains that the announcement "will not have lifted already depressed Labour spirits".
Economic data are improving, and now interest rates are likely to be held until after the next election. Wintour adds that polls are showing "a trend towards voters accepting that austerity was the right course for George Osborne to choose".
Mark Carney to hold bank rate until jobless total falls to 7% 07/08/2013
MARK CARNEY'S 'forward guidance' policy is now in place. The Bank of England will not raise the bank rate from the current 0.5 per cent until Britain's unemployment rate has fallen to seven per cent. Because that is unlikely to happen until 2016, according to the Bank's own projections, the bank rate should stay at 0.5 per cent for at least another two-and-a-half years - bringing reassurance to mortgage holders.
Nor will the Bank of England cut back on its 375bn asset purchase programme otherwise known as
quantitative easing until the jobless rate is down to seven per cent.
Carney, in his first big set-piece address since taking over from Sir Mervyn King last month as Bank governor, said his strategy was designed to help secure Britain's economic recovery - a recovery he described as being underway" and apparently broadening".
"While that is certainly welcome," he added, the legacy of the financial crisis means that the recovery remains weak by historical standards and there is still a significant margin of spare capacity in the economy. This is most clearly evident in the high rate of unemployment."
A fall in Britain's jobless rate from 7.8 per cent to seven per cent would mean that 750,000 people were back in work.
First reaction to Carney's statement came from the currency and stock markets.
The pound fell against other currencies because many had estimated an earlier date for a Bank rate rise and were now having to redo their sums. Shares rose immediately, but then quickly fell back, the BBC reports.
On the mortgage front, Jonathan Harris of Anderson Harris says Carney has offered "far more certainty than we have ever had". While it brings no comfort to savers, it will reassure overstretched borrowers who are worried about potential rate rises, he tells the Daily Telegraph.
Peter Rollings, CEO of estate agent Marsh & Parsons, tells the? Financial Times it will give the UK's housing market a "significant boost".
He adds: "Growth in the country's GDP, reduction in unemployment and a feeling that we are finally out of the economic badlands means that the market can now be assured of certainty as far as interest rates are concerned."
But Marc Oswald, from Monument Securities, believes basing the interest rate on the unemployment rate looks like a "big mistake" as it is difficult to assess how many of the longer-term unemployed are actually employable.
Mark Carney to unveil 'forward guidance': what does it mean? 06/08/13
BANK OF ENGLAND governor Mark Carney is expected to unveil his much-heralded policy of "forward
guidance" on interest rates when the Bank issues its monthly inflation report tomorrow. As the Financial Times reports, it is a policy "close to his heart" - something he introduced in Canada in 2009. Interest rates were fixed at 0.25 per cent for a year and the policy was credited with helping to stabilise the Canadian economy. It has since been adopted by the US Federal Reserve, but it has never been used by the Bank of England. How will it work and is it a good idea? ? What shape will it take? The policy itself will not come as a surprise, having been clearly telegraphed by the Chancellor in the March Budget and by Carney himself at his appearance before MPs in February. "The big question," says the Sunday Telegraph, "is what shape it will take." It could be "time contingent" with a simple promise to keep rates at their current level for a set amount of time, or it could be "state contingent" with a rate rise triggered when the economy crosses specific thresholds, involving unemployment, GDP, growth or inflation.
Will it lay down future rates? "At its core, forward guidance relates to the time dimension of monetary policy," explains the Financial Times. "Rather than just signal the policy rate today, forward guidance is meant to signal the policy rate also in the future, either acknowledging a good degree of uncertainty, or with virtual certainty."
Will the public understand it? By reassuring markets and the public that interest rates will not suddenly leap up, "forward guidance" is designed to boost economies by encouraging businesses and households to borrow more and save less, says the? FT. But Mark Carney must make an announcement which the general public can understand," says the Sunday Telegraph. Bringing in nominal targets "would scarcely qualify as clear or simple".
Is the City getting over-excited? The "star-struck" City has worked itself into a state of heightened arousal discussing how the Canadian will use forward guidance, says Simon Goodley in The Observer, while the FT agrees that the markets have become "over-excited". And forward guidance might not be as helpful as it looks, warns Andrew Sentance in the Sunday Times. It will not change the outlook of markets, businesses or the public, he says; it leaves the bank vulnerable to unexpected economic events and does not address the issue of how the economy will eventually exit the era of low interest.
Might it lead to inflation? Prof Michael Woodford of Columbia University says it could cause inflation if the guidance stimulates the economy too much. He counsels against using specific dates. "The ideal thing would be to talk about specific economic conditions and say interest rates will stay where they are until certain conditions that are not currently satisfied are reached," he told the BBC.
Mark Carney lucky as inflation under forecast 17/07/13
MARK CARNEY enjoys a reputation as a 'rock star banker' who can do no wrong. But the new governor of the Bank of England narrowly avoided having to write a letter this week to his boss, Chancellor George Osborne, explaining why inflation is above target.
Carney is required to inform Osborne in writing if inflation is one per cent above the target rate of two per cent, The Times explains. The consumer prices index rise came in at 2.9 per cent in the year to June, up from 2.7 per cent in May, according to the Office for National Statistics.
As a result, Carney was saved from having to put pen to paper "by the skin of his teeth".
Economists had expected CPI to come in at about 3 per cent. But even at 2.9 per cent it is the highest since April last year, with the biggest price hikes notched up by motor fuels, clothing and footwear. The? globalpost website says the slightly lower than expected inflation rate strengthens Carney's hand to "reassure consumers, businesses and financial markets that interest rates are unlikely to rise any time soon".
It has also emerged that Carney voted against printing more money as part of the the BoE's quantitive easing (QE) stimulus programme when he chaired his first meeting of the bank's Monetary Policy Committee (MPC) earlier this month. The Canadian also voted to keep interest rates at the historically low level of 0.5 per cent, according to minutes of the meeting published today.
Howard Archer from analyst IHS Global Insight told the? Daily Telegraph that Carney's decision to vote against more QE and the fact that he "achieved consensus" by persuading the eight other members of the MPC to vote with him is "headline-grabbing news".
Alan Clarke from Scotia Bank agrees it looks like another feather in the Canadian's cap. "We had the impression from our Canadian colleagues that Carney doesn't like disagreement, he likes to have a united front and he's got it after months of disagreement," Clarke said.
Mark Carney puts stamp on BoE with rates call to markets
MARK CARNEY has moved quickly to put his stamp on the Bank of England, breaking the bank's tradition that it does not comment on financial markets by issuing a statement that said investors were "not warranted" in thinking that interest rates will start rising at the end of next year.
The statement and a similarly unprecedented edict issued by European Central Bank president Mario Draghi caused stock markets to surge across Europe, while the pound slumped. The FTSE 100 index closed up 3.1 per cent, while Germany's DAX stock index closed yesterday 2.11 per cent higher.
Carney chaired his first meeting of the Monetary Policy Committee, the nine-member group that sets interest rates, yesterday. The MPC voted to hold rates at 0.5 per cent and to leave quantitative easing (QE) unchanged at 375bn in July.
Afterwards, the BoE took the "unusual step" of publishing a statement alongside the decision that economists said confirmed Carney's status as "a policy dove", says the Daily Telegraph. The BoE statement and a similar statement about interest rates from the ECB reflect the Central Bank's determination to keep interest rates low in "an attempt to reassure markets unsettled by the possible end of the US Federal Reserve's bond-buying program," the Washington Post says.
Fathom Consulting told the Daily Telegraph it was likely the BoE was "expecting to keep rates on hold until at least 2015".
In his statement, the ECB's president echoed the message, saying rates would be at current or lower levels "for an extended period of time". The European bank, which is facing a new crisis in Portugal, "had even discussed a rate cut," Draghi added.
Many economists welcomed the move. The CBI's director of economics, Stephen Gifford, told The Guardian: "recent financial market volatility and today's statement by the Bank have strengthened the case for providing greater clarity around monetary policy, which businesses would welcome."
However, former MPC member, Andrew Sentance, tweeted: "Inflation is set to rise, and BoE statement pours cold water on rate rises. Pretty dismal signal from MPC to Britain's savers."
The talk of low interest rates took a toll on the pound as it became a less attractive currency for investors to hold. Sterling dropped 1.4 per cent against the dollar to $1.5070, the steepest decline since September 2011. The currency fell 0.7 per cent against the euro to 1.1663.
James Knightley of ING said: "This is pretty aggressive stuff that has prompted a sharp move lower in sterling and suggests that Carney is very much in the dovish camp."
Positive economic data give boost to Carney's first days? 02.07.13
MARK CARNEY has enjoyed a fortuitous start to his new job as governor of the Bank of England thanks to positive figures from the UK's manufacturing, export and mortgage sectors.
The BBC says the manufacturing index rose to 52.5 last month - its highest since May 2011. Any reading above 50 demonstrates growth in the sector.
A British Chamber of Commerce (BCC) report said export growth in the services sector is the highest since the survey began in 1989. IT firms and TV show-makers have reported solid overseas demand for their work.
The BCC survey of more than 7,400 businesses also puts domestic and overseas sales in their best health for several years, while business confidence has risen though none of these indicators has yet? returned to the pre-crash levels of 2007.
BCC chief economist David Kern said: "The improvement in most key balances in our second-quarter survey supports our view that the UK upturn is slowly strengthening."
However, the BCC said risks still remained, with investment and cash flow still relatively weak.
"What we need now is not to disturb the modest recovery we have under way," Kerd said, "and not to take risks with inflation and to help with businesses' financing."
Bank of England figures showed mortgage approvals surged to 58,242 in May, their highest level since December 2009.
David Tinsley, UK economist at BNP Paribas, said: "As Mark Carney takes up his position these data flows confirm trends that have been developing in the UK. For Mr Carney the question is whether the improvement in the activity data is strong enough and whether it will prove enduring."
On Wednesday Carney will chair his first meeting of the Bank of England's Monetary Policy Committee.
According to The Guardian, economists expect him to make no immediate change to the Bank's programme of quantitative easing and to keep interest rates low, at 0.5 per cent, throughout this year and even into 2014.
Mark Carneys appointment to Bank of Canada was a surprise
MARK CARNEY wasn't just a surprise appointment at the Bank of England, where he starts on Monday he was a surprise pick at the Bank of Canada too, says Stephanie Flanders, the BBCs economics editor.
Of 36 economists asked back in 2008 who would get the job as the Canadian central banks governor, only three mentioned Carney: nearly all thought it would be the long-time insider Paul Jenkins.
Crispin Black: BoEs Mark Carney in a proud Canuck tradition? ? Now, Carney leaves Canada for a five-year stint in London generally well liked by the Canadian people and press, having been credited with helping Canadas economy recover faster from the global downturn than any other major developed nation. One newspaper put Carney on its list of "Canadians abroad that we want back" before hed even gone.
So Flanders took herself to Canada to decide for myself whether's he's anything like as good as he's cracked up to be. ? In his first month at the Bank of Canada, Carney cut interest rates by half a percentage point, while other central banks still thought the financial crisis would blow over. Despite others following suit months later, the back in 2008 and it remains the only G7 country that has not had to spend taxpayer money bailing out banks. Its economy is nearly five per cent larger now than it was five years ago, whereas Britain's is over two per cent smaller. Inflation has also been a lot lower: 1.7 per cent, on average, versus 3.2 per cent in the UK. The OECD says the Canadian economy bounced back so quickly from the crisis "thanks to timely monetary and fiscal stimulus, a sound financial system and high commodity prices." ? Flanders says only one of these four can be directly attributed to Carney. So, no, he did not single-handedly rescue Canada from the worst of the financial crisis - but, boy did he win over the press".
Mark Carney: countdown to day one at the Bank of England
The challenges, the risks and the hopes as Canadian Carney prepares to take over in London
THERE may be great expectations for Mark Carney's governorship at the Bank of England, but the experts are not expecting a whirlwind of change when he arrives on Monday. Not in week one, anyway.
A poll of 57 economists suggests Carney will introduce no immediate changes to current monetary policy, his old national paper, the? Globe and Mail, reports.
Carney will chair his first Monetary Policy Committee next week, the paper says. But when the outcome of that meeting is announced next Thursday,? only two of the economists polled see an additional 25bn injection in the QE programme, last changed a year ago. None of the others agreed.
The Globe and Mail notes that external MPC member David Miles told a conference in London on Wednesday that more asset purchases could be helpful as economic recovery remains slow. However, the majority of the economists polled did not believe the Bank's dormant asset purchase programme would be restarted.
And only six out of 57 predict any movement in the base rate from 0.5 per cent any time before 2015, despite the Bank's failure to keep inflation below 2%.
Countdown to Carney
HOW sensitive will Mark Carney be to the Bank of England's 319-history and traditions?
An old Goldman Sachs colleague tells the? Daily Telegraph he is "too smart to be tone deaf".
But according to a story from his early days at the Bank of Canada, where he had to overhaul some pretty archaic habits, Carney asked for a BlackBerry and was told: "We don't do that here". To which he replied: "Wanna bet?"
Now, theres only a week to go before the new Guv'nor arrives at Threadneedle Street and as well as the big quantitative easing question does Mark Carney follow the chairman of the US Federal Reserve, Ben Bernanke, and threaten to turn off QE once and for all there's the issue of how the Bank of England makes its decisions about the economy.
As the Sunday Times columnist David Smith notes, "Unlike the Bank of Canada, where the governor makes the final decisions on monetary policy, the BoEs fiscal rulings are decided by a nine-member, one person/one vote committee. Carney no doubt knew this when he took the job, but that was before [Mervyn] King was outvoted in each of his last five meetings. The culture shock could be considerable."
Carney is known to be in favour of taking his foot off the QE pedal, but can he persuade the other eight members of the Bank's monetary policy committee to see it his way?
Mark Carney: Europe faces lost decade unless it's bold
EUROPE faces a lost decade of stagnation unless it takes "bold" policy measures such as those seen in Japan, incoming Bank of England governor Mark Carney has warned.
Carney fuelled speculation he will try to boost quantitative easing when he begins at the Bank next month, the
Daily Telegraph notes, by applauding Japans decision to turbocharge its own programme.
"Europe can draw lessons from Japan on the dangers of half-measures," said Carney. "Europe remains in recession. Deep challenges persist in its financial system. Without sustained and significant reforms, a decade of stagnation threatens."
Carney made the comments during his last speech as governor of the Bank of Canada. He also claimed that of all the countries in the G7 only Canada does need "to repair". He said its success was due to "responsible fiscal policy, sound monetary policy, [as well as] a resilient financial system".
Carney will be paid 800,000 a year in the hope he can have a similar effect on Britain's economy when he becomes governor in July. He faces high expectations as Reuters notes, the British press "have alluded to him as a sort of rock star".
Carneys comments come ahead of what could be a bruising day for George Osborne. The International
Monetary Fund is expected to criticise the Chancellor when it publishes its annual update on Britains economy today. It follows IMF chief economist Olivier Blanchard warning Osborne was "playing with fire" on austerity last month. "The danger of having no growth, or very little growth, for a long time is very high. You get a number of vicious cycles which come into play," he said. Last month the international economic body cut its growth forecast for the UK and called for more flexibility in Osborne's approach.