What would it take for Ben Broadbent to vote for further Base Rate cuts?

This morning a speech was given by Ben Broadbent of the Bank of England which touches several of the themes of this blog. One of them -falling interest-rates- is pretty much a theme of my career as whilst there have been ebbs and flows the trend has been downwards. Of course at the time it has not always felt like that and I still have vivid memories  of 1992 when the UK found itself ejected from the Exchange Rate Mechanism or ERM and not only was the Base Rate moved from 10% to 12% but an additonal move to 15% was announced for the next day. Actually events were so fast moving that by then we were back to a fully floating currency and the latter rise never took place! If younger readers are bemused by the concept of 12% or 15% interest-rates let me apologise.

Let us start with the misrepresentations 

Towards the end of the speech we are told this with reference to the credit crunch era.

inflation has remained broadly close to target

Perhaps Ben  found the period where UK consumer inflation pushed over 5% in the autumn of 2011 so painful that he now suffers from a type of amnesia on the subject. Either that or the word broadly needs to go into my financial lexicon for these times. When you consider the extent of the impact of the credit crunch on the UK economy then the average annual official inflation figures of 3.3% for 2010 and 4.5% for 2011 look rather extraordinary to me. If we look at the Retail Price Index the average annual rate of inflation from 2010 onwards has gone 4.6%,5.2%,3.2%, and then 3% in 2013. Those who have seen their real wages drop due to this might like to wonder if Ben thinks that their wages are broadly the same.

The Excuses are next

Apparently when the Bank of England was cuting interest-rates it was just following orders or something like that!

This bears out, for me, that the real task for policy is to understand – and then adapt to – economic forces affecting the natural, or equilibrium rate of interest.

That is an interesting swerve of responsibility that I doubt we would have seen had policy been more successful. But I also have a theoretical challenge for the sentence above above which is that one thing we should have learnt from the credit crunch period is that the concept of equilibrium in economics is both bankrupt and otiose. There was no equilibrium in the pre credit crunch period and there certainly isn’t any to be found right now. Indeed even if we briefly enetered a period of it by fluke we would not know that we were there if we allow for the leads and lags of economic measurement. Let me go further I fear that it is economic models and theories pressing for their equilibrium that helped tip us over the edge.

So when the Bank of England slashed interest-rates in 2008 it was just following economic forces? As we now these days that market particpants spend their time front-running central banks can you spot the flaw in central banks responding to market particpants which are one of their measures of economic forces? That is a recipe for quite a mess,which of course is where we find ourselves.

Falling interest-rates

This has become a regular theme of Bank of England speeches recently. Do you think they might be warming us up for something? The situation is summed up the the sentence below

The yield on the 10-20 year portion of the indexed gilt curve, for example, was 4% in the mid-1990s; by the end of that decade it had dropped to barely 2%; on the eve of the financial crisis, in mid-2007, it was less than 1%; today it is -0.3%.

What he is doing here is giving us a measure of real interest-rates in the UK and he is using index-linked gilts to achieve this. The fall is quite something and is a fundamental change which preceded the credit crunch.
However whilst Ben tries to tell us that the recent move is nothing to do with the Bank of England he cannot avoid the isse of Quantitative Easing which set out to reduce bond yields directly

Work at the Bank suggests that the combined effects of the various stages of QE reduced 10-year gilt yields by as much as 100bp.

Are those the same yields which are nothing to do with Bank of England policy Ben or different ones? The  contradictions get worse I am afraid to say because we get told this about QE.

;As the Bank of England explained in a Quarterly Bulletin article a couple of years ago, without QE we’d have experienced higher unemployment,lower wages and lower inflation.

So we see it confirmed that if it feels it can claim something good the Bank of England is responsible for events. Nice of it to be judge and jury on itself don’t you think?

QE has not caused an increase in inequality

Ben has it a bit awkward here because of course he has just praised himself on the subject of QE so  a standard disclaimer will not work. Instead we get this.

(i) interest rates are low because central banks have chosen to keep policy rates low and (ii) this has pushed up the price of risky assets, benefiting only those who happened already to own them. I’m not sure either of these is true.

Unless the credit crunch has lasted a lot longer than I have realised Ben slips in a change of timescale here.

But over the last 15 years, equities have done poorly.

I know that sometimes it feels like the credit crunch has lasted that long but the truth is that it has not managed even half that. Those of a mind more prediposed to conspiracy theories than me may be thinking that Ben has been planning some sort of catch-up for equities.

My summary of the excuses and misreprentations made by Ben Broadbank today and more generally by his central banking colleagues can be summed up by this from the Spinners.

It’s a shame….It’s a shame

What about interest-rates?

We do get a clue from this speech as shown below.

I’d say that neutral real rates are likely to stay low for some time yet – with the implication that any rises in official policy rates are likely to be “limited and gradual” – but that, eventually, as the headwinds previously highlighted by the MPC dissipate, they are likely to rise.

Now let us add in this bit below.

For a variety of reasons, and over a long period of time, this underlying rate has been driven remorselessly downwards. An official interest rate that might once have been considered inflationary is now contractionary;

You may note that interest-rate rises have been moved to some unspeciifed future date whilst the trend to wards lower interest-rates and yields is apparently ongoing.

Comment

I would like now to look at todays retail sales figures from the UK. The numbers for September exhibited both disinflation (falling prices) and deflation over the numbers for August. Some care is needed as whilst disinflation has become rather ingrained in the retail sales numbers recently there has been much . the quarterly figures remain positive in volume terms as do the annula ones. But should this be the new trend how long would the Ben Broadbent of this speech take to recommend an easing of monetary policy and Base rates? After all he would only be reflecting economic forces.

Oh and if we link to today’s news a possible turn downwards in retail sales is about the last thing that Tesco needs right now.

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17 thoughts on “What would it take for Ben Broadbent to vote for further Base Rate cuts?

  1. Hi Shaun
    Read this in time for a comment today.
    The BoE works for the commercial banks. They are still in a mess. The rest of the ‘rationale’ is BS. The BoE will do whatever it takes to keep the banks afloat, the rest of us can ‘go hang’.

    • Hi JW

      It is a sad reflection of these times that in spite of all the efforts from the various central banks to bailout and rescue banking systems that there remains so much doubt about them some 6/7 years into the credit crunch. The main loose wire in the UK is RBS whereas the ECB right now must be dealing with quite a few loose wires as it tries to make the stress tests it will release on Sunday look presentable.

      Also I would not be surprised at all to discover that some banks have been following the style of accountancy that happened at Tescos for a while, in fact I expect it to happen.

  2. 1) Tesco: more people lose their jobs for misreporting profits, which must have been a genuine mistake, that for tacitly allowing tampering with our food.
    2) Inflation, be it RPI/CPI or wage inflation, is compounded, meaning that it has a parabolic trajectory.
    If you flatline one for a period, then it loses balance with the other, so, since wages have fallen behind by 10%, and those of lower earners/those on benefits have suffered more, it means that if, wages/benefits increases rise “in line” with inflation from now, THE POOR CONTINUE TO FALL FURTHER AND FURTHER BEHIND, since the curve of their income is behind the curve of inflation.

    3) Ben Broadbent wants a kick in the knackers from us who have to live in the real world; perhaps that’ll remove the smug, self-satisfied tone.

  3. Hello Shaun,

    Obviously Mr Bent lives in Alice in Wonderland .

    I think I can help here :-

    ‘When I use a target ,’ Benty Bent said, in rather a scornful tone, ‘it means just what I choose it to mean — neither more nor less.’

    Keep an eye out , Shaun , with compulsive liars like those at the BoE the truth can slip out by accident !

    With such a dismal record of predicting trends like the BoE I suspect further talk of lower interest rates and no more QE to be followed my massive purchases of bonds and a sharp rise !!

    Indeed the mould on the corpse of the UK economy has been getting more fetid as the years roll by !

    Forbin

    • Hi Forbin

      Noo2Economics was on the same track the other day by suggesting that the fact that the Bank of England was gloomy might be taken as a good sign for the UK economy! As you say with its track record there is indeed a point there….

      There has been a sharp rally in the oil price today but even after a 2.6% rise Brent Crude has only just made US $87. Also bear markets have sharp rallies don’t they?

  4. Hi Shaun,

    If younger readers are bemused by the concept of 12% or 15% interest-rates let me apologise.

    In 1989/90 I handed my house back to the Nationwide Building Society when the rate on my mortgage hit 14.5 %.. I can only agree with Forbin and JW … Alice in Wongaland and BS.

    I might take issue with this though …
    Oh and if we link to today’s news a possible turn downwards in retail sales is about the last thing that Tesco needs right now.

    What Tesco (and by extension the wider economy) wants and what Tesco needs are very different things. Sunlight / disinfectant and all that.
    In a pleasing snub to Gresham;s Law a little more openness and honesty might just drive out some of the BS and even some of the bullshitters. Surely one of the lessons that we should take from the events of the last ten years is that the job of clearing up a mess is not always best left to the schmuck who effed it all up in the first place?

    Ah well … it seems that my head is stuck up in the clouds again, or possibly somewhere far less savoury!

    Onwards and downwards, chaps. You know it makes sense!

  5. A lot hangs on the Fed meeting next week and whether they have the brio to stop QE. That would be quite a statement, and if they’re prepared to hold the line we might even get the US raising rates next summer/autumn? (You have to live in hope!) Also, tomorrow (I think) we get the first estimate for UK 3rd quarter GDP – is it possible that the BOE gurus have already seen the numbers and we’re in for a shocker? That would tally with all the open-confession gloom and doom and the panic about consumer inflation dropping below 1%. I don’t imagine Carney wants to start writing letters. Might they be thinking of a last-chance-saloon rate cut and more QE to fire the stocks/houses up again for next summer? A last hurrah? It was a global credit crunch/collapse and it’s been a global economic sag ever since; but who will make it to escape velocity first, if it’s even possible, Eurozone, US, Japan or Albion?

    • Hi Peter

      The UK GDP numbers would have been available to a (not so) select list at 9:30 am this morning so the speech would have been written before Ben Broadbent knew the numbers. As to a <1% CPI inflation print then those on benefits which have seen their rises capped at 1% might have a wry smile alneit through gritted teeth. It would at least be nice to have one that was for being below target….

      The Fed is an interesting one as they have got quite close to endgaming themselves on the issue of ending QE3 next week. There seems little point in keeping it at the current low level and imagine what an increase would do! So maybe we will yet see QE4.

      As to escape velocity has anybody achieved it yet?

      • So here’s the choice, ladies and gentlemen: we can halt all QE/forward guidance tampering and bump interest rates up to 1%, let the markets crash, watch thousands of businesses go bankrupt, have maybe a bank or two fold (and by the way, did you get that memo last night saying we’re not bailing out any more banks with public money?) crush house prices and wipe out all equity overnight, see millions of people flapping about in despair like fish on the deck and lose our own jobs and most of our vast wealth held in assets, face political censure or worse BUT…stand a good chance of getting back to some economic normality, OR… we could do nothing. May I have your votes?

  6. ‘So when the Bank of England slashed interest-rates in 2008 it was just following economic forces? ‘

    Just one of the automatic stabilisers we hear so much about, presumably such as:-
    Bank bonus’ down – more QE
    Bank profits down – more FFL or maybe subsidise BTL mortgages (ooops, sorry)
    Bank taxes down – ‘temporarily’ increase VAT
    Public Services revenue down – lets have RPI + 2% increases
    etc

    You see the trend and the best bit is that as they are automatic no-one is responsible, they happen all on their own.

    Keep up the excellent work Shaun.

    • Hi Dl

      Thank you. With so many things either happening automatically and others being driven by economic forces it makes you wonder what our leaders and establishment actually do with their time doesn’t it? I thought they were well paid before now they look extremely overpaid.

  7. Hi Shaun, I noticed a new player in the PayDay loans market, the rates are substantially down against Wonga. “Provident” caught my ear on the radio and my eye on website banners, only 399% APR, which is a relative bargain to Wonga . So it would seem that all rates are falling?

    They will bring a £1000 pounds in cash around to your front door so it all sounds very convenient, a bit like you could get your Pizza orders in to “just Eat” and then get Provident to bring the cash around at a “giveaway rate” for the takeaway, as you say the money doesn’t go as far as it used to. 🙂

    Paul C.

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