Will the Bank of England follow the Riksbank of Sweden into negative interest-rates?

Today sees the publication of the latest Bank of England Quarterly Bulletin which is more colloquially known as the Inflation Report. It comes at a time of considerable international developments which have taken a step forwards this morning and one in particular challenges a statement regularly made by Bank of England Governor Mark Carney. Let us first look at the state of play of the UK economy.

Economic Growth

Yesterday saw a cheering update from the NIESR (National Institute for Economic and Social Research) and the details of this are below.

ur monthly estimates of GDP suggest that output grew by 0.7 per cent in the three months ending in January after growth of 0.5 per cent in the three months ending in December 2014.

This shows a welcome return to form for the UK after the dip to a quarterly growth rate of 0.5% in the official numbers for the last quarter of 2014. A day or so before the NIESR had also raised its forecast for the next couple of years.

The economy will grow by 2.9 per cent in 2015 and 2.3 per cent in 2016.

Unemployment will drop to 5.2 per cent by the end of this year.


As you can see this is all rather satisfactory especially if we add in that inflation will be well below target as we approach the summer and would have had the NIESR gritting its teeth!

We can add this week’s production data into the mix too. Whilst on the surface it was not that great it was in fact an improvement on what the Office for National Statistics had estimated in its GDP report. Also there were hopeful signs for the UK manufacturing sector.

The largest contribution to the quarterly growth came from manufacturing, which increased by 0.2%………..Total production output increased by 1.4% between 2013 and 2014. Of the four main sectors, manufacturing output was the only one to rise, increasing by 2.7%.


The production numbers have also been pushed downwards by the decline in the value of North Sea Oil and Gas output which is a downside of the otherwise positive for the UK economy impact of the lower oil price.

The outlook

If the business surveys or purchasing managers indices are any guide then the immediate outlook is bright too.

The January PMI surveys signalled a reassuringly robust start to the year for the UK economy, indicating a quarterly rate of GDP growth just over 0.5%.


the three surveys collectively signalled the strongest job creation since data were first available back in 1998. The surveys are currently signalling an impressive net rate of job creation of approximately 70,000 per month.


That is all rather upbeat and perhaps the continuing improvement in the employment situation will provide a boost to wage growth as this has been lacking so far.


This is supposed to be not far off the be all and end all for the Bank of England as it is supposed to aim at an inflation target of an annual rate of 2% for the Consumer Price Index at around the 2 year horizon. Here too the days of the Bank of England overlooking inflationary excesses are long gone for now as the impact of falling oil and commodity prices depresses headline inflation rates. As of December the UK CPI was at 0.5% and we know that oil prices fell further in January.

Such thoughts were backed up by the latest business surveys.

Input costs across the private sector meanwhile rose at the slowest rate since the height of the financial crisis in July 2009.


Not all inflation is so benign

Perhaps journalists may like to ask the Bank of England about this source of institutionalised inflation in the UK.

The external members of the FPC and the Independent Directors of the PRA were paid at the rate of £77,520p.a. In February 2014, the Committee reviewed, in the light of experience, the time commitment involved for the members of each of these committees, and decided to increase the fees of an FPC external member to £90,698p.a., and of an Independent member of the PRA Board to £102,326p.a


I make that 19% and 32% respectively. Nice work if you can get it! Er a 2% inflation target?

Also our old inflation target called RPIX is running at a rate of 1.7%. It barely gets a mention these days as the headlines scream deflation/disinflation but if it was still the measure both reporting and perception would be rather different. As would the situation if we had put house prices into the index (which is of course why the UK establishment have rejected this…Arise Sir Paul Johnson).

At this point we may be due one of Mark Carneys hints of higher interest-rates. Perhaps he is a particular fan of the story of the boy who cried wolf and wishes to act it out in real life. I would imagine that it would be combined with looking for real wage growth.

At this point he may choose to ignore the fact that -partly due to multi-year highs against the Euro- that UK monetary policy has tightened slightly as the value of the UK Pound is up bu around 4% since the last Inflation Report.


This came from Sweden earlier which regular readers will recall has previously cut interest-rates in spite of forecasting quite strong economic growth. This was a clear change in the central banking play book and here is this morning’s next chapter.

The Executive Board of the Riksbank has therefore decided to cut the repo rate by 0.10 percentage points, to -0.10 per cent, and to adjust the repo-rate path down somewhat.


We find something very revealing in the explanation of why this has taken place and the emphasis is mine.

growth in Sweden will benefit from the low oil prices, the weaker krona and the very low repo rate. GDP growth is expected to increase at a faster pace in the coming period and the labour market is expected to strengthen.


This is very important as we are seeing a central bank cutting interest-rates into negative territory whilst telling us that the outlook is bright. Many trends come from the Nordic area don’t they?

Also they are telling us that underlying inflation is expected to pick-up.

for instance, the CPIF excluding energy, has bottomed out and is rising. The krona is weaker than anticipated, which will also contribute to somewhat higher inflation


This is very significant as imagine if growth happens as they anticipate and inflation does pick-up at the policy horizon of circa two years then they have just made completely the wrong move!


I am writing this as the press conference has begun and Mark Carney is making the hints towards higher future interest-rates that I expected. For example inflation will return to target in two years time and Robert Peston of the BBC is being used to broadcast this message.

Bank of England forecasts sharpest increase for decade this year in real take home pay


What again? Although a little care is needed as wage growth may not change much but falling inflation will boost real wage growth for as long as it persists. So we are getting a little tease about higher Base Rates in future which is continued here in the Inflation Report as we get a mention of this.

Bank Rate increases


But if we think of Sweden which is cutting interest-rate into what we used to think of as an economic boom and what the Bank of Canada has called “divine ” I would like to draw your attention to this.

The Committee could also decide to expand the Asset Purchase Facility or to cut Bank Rate further towards zero from its current level of 0.5%.


Reductions in Bank Rate are therefore less likely to have undesirable effects on the supply of credit to the UK economy than previously judged by the MPC.


Dear Mark Carney whatever happened to your assurance that 0.5% Base Rates were/are a lower bound which cannot be crossed? I have been arguing since December 2013 that the next move in the UK could easily be a monetary easing and it was nice to see my thoughts been spread by Bloomberg last week.

I will be on Share Radio after the 1 pm news today to discuss such matters and any other developments between now and then. I can’t wait!



9 thoughts on “Will the Bank of England follow the Riksbank of Sweden into negative interest-rates?

  1. Hi Shaun

    Excellent article as always.

    Great shout on the interest rate cut.I see that they’re chomping at the bit to fire up the QE presses again. And what perfect timing with the EU turning on the taps as well.

  2. Hello Shaun ,

    To answer you BBC question – of course they’ll be surprised ! 😉


    “Bank of England forecasts sharpest increase for decade this year in real take home pay”

    did anyone mention the BoE track record on forecasts ?

    nope , didnt think so

    It seems the storm clouds gather and since 2008 the western economies remain effectively bust as it seems so are the Banks. . Didn’t we have currency wars in the 1930’s? did that turn out well?

    Ah interesting times


    • Hi Forbin

      I guess if you keep pointing out that the Bank of England is one of the worst forecasting organisations in the world you lose you place in the pecking order to ask that nice Mr. Carney a question at the press conference! These days there is a lot of competition to be the worst forecaster, the ECB deserves a prize, the UK OBR is always there or there abouts and you cannot ignore the Nationalbank of Denmark or the Riksbank of Sweden either.

      Perhaps the BBC could purchase the re-runs of Cilla Blacks “Surprise! Surprise!” show.

      • … or the press conference’s could be ended with a blast from Billy Talent’s “Surprise Surprise”.
        Great blogs, Shaun, keep them coming!

  3. Thank you for the great column, Shaun. I always rely on you to tell me what is happening at the Bank of England.
    There is nothing at all in the Inflation Report about the new UK quarterly series for owner-occupied housing, nor were they mentioned in the press conference. This is in stark contrast with the big splash that was given the now discredited CPIH series in the May 2013 IR after the CPIH was introduced in March. I left a comment about it on Chris Giles’ column on the IR in the Financial Times. I am not surprised that Mr. Giles wouldn’t make anything of it since he was part of the Consumer Prices Advisory Committee that endorsed the CPIH. However it is disappointing that Larry Elliott of the Guardian, who has always been so concerned that the UK might create a new housing bubble, just ignored it as well.
    When 30 European countries are now obliged to calculate these quarterly OOH series since the BoE’s November IR, all leading up to these series being incorporated into the target inflation indicator of the European Central Bank, it strikes me as both rude and arrogant for the Bank of England to ignore these quarterly OOH series in the pages of the IR, whatever its opinion of them. I hope the BoE does something to remove this slight to Eurostat and the ECB in the May IR.

    • Hi Andrew

      When the UK Office for National Statistics first published the new series which puts house prices (NA) in the CPIH I was not surprised that I was the first to call them even though a few days had passed. I may have been the only caller! Apart from the discussions on here I do not recall it being mentioned elsewhere.

      In my opinion Mark Carney wants low inflation readings right now giving him the option of a further easing in monetary policy. That is why CPIH (NA) has been shuffled to the outer limits of UK statistics.

      The problem of having an FT editor on CPAC was that he would be writing about his own decisions where there is a clear moral hazard. This has got worse and worse as it has become obvious to even the most cursory investigation that the decision about UK CPIH was a debacle and embarassment.

  4. I think Carney is playing to the gallery. He knows with interest rate so low further cuts will have no effect, but he also knows the MSM and the populace don’t know that, so he talks of possible further rate cuts to soothe them in case they see any negative economic news.

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