Why good news is bad news for Bank of England governor Mark Carney

It seems perverse, but Mark Carney could do with some bad news on the economy.

Ever since the Bank of England's new governor arrived, the data has been relentlessly upbeat, and that's not so good if your message is that a fragile recovery requires interest rates to be held ultra-low for the next three years.

Markets believe that policy will be tightened long before that and this feeling hardened on Monday with the latest health check on manufacturing showing growth in order books and output at their strongest since 1994.

The report also showed that inflationary pressures among UK factories were on the rise, while separate data from the Bank of England suggested that the much-vaunted Funding for Lending Scheme has led to extra credit for the housing market but not for businesses.

It could be that small businesses are finding alternative sources – such as peer-to-peer lending – to circumnavigate the banks. It could be – as the government hopes – that it is taking more time for the banks to respond to the bespoke needs of their business customers than it is to churn out standardised mortgage products.

But this is not what the City sees. It sees output booming and firms complaining about a lack of bank funding to finance new investment. That points to capacity constraints, higher inflation and tighter policy. Market interest rates are rising and Carney fears they could choke off recovery. Which is why he might welcome a bit of gloom.

Powered by Guardian.co.ukThis article was written by Larry Elliott, economics editor, for The Guardian on Monday 2nd September 2013 19.31 Europe/London

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