When did Governors of the Bank of England morph into politicians?

Today sees the last formal record of the pre-election views of the Bank of England on the UK economy as the latest policy meeting  minutes are released. One thing that we can be sure of is that for the whole of this Parliament UK Bank Rate has remained at the emergency level of 0.5%. Considering all the changes and events which has taken place this is really rather extraordinary! Have official interest-rates been abandoned as a tool for influencing the UK economy? If they have been downgraded it is a tacit and implicit victory for my long-run theme that the links between official Bank Rate moves and the real economy are much weaker as we approach 0%.

What has the Bank of England done then?

In has added to its Quantitative Easing (QE) operation as to the original £200 billion an extra £175 billion was added ( £75 billion in October 2011; £50bn in February 2012 and £50bn in July 2012). Actually several members wanted to do more including the then Governor Mervyn King so they would have inflated the UK economy into the current boom in a clear example of policy failure. This is one instance where we should be grateful that we got a new Governor as otherwise the existing one might have eventually won over his colleagues.

Next the Bank of England switched to boosting the UK housing market as July 2012 saw the launch of the Funding for Lending Scheme. Boosting the banking sector via cheap liquidity which allowed them to cut mortgage rates by around 1% was potentially embarassing so we were told instead that this would boost lending to smaller businesses and companies. How is that going?

The twelve-month growth rate was -1.8%.

Actually after a long period of boom we are now seeing some months where it actually rises! Of course by contrast mortgage lending headed higher quickly and house prices leapt giving the UK economy more of a junkie boost as its favourite addiction got fed one more time.

But generically this phase involved switching from official interest-rate moves to more direct market involvement or if you prefer manipulation. Firstly bond yields and longer-term interest-rates via QE which was then reinforced by lower mortgage rates via another subsidy to our banking sector.

Forward Guidance

In the summer of 2013 there was a new Governor Mark Carney who was strongly influenced by the fashion of the time called Forward Guidance. The Kinks put this to music.

He flits from shop to shop just like a butterfly.
In matters of the cloth he is as fickle as can be,

‘Cause he’s a dedicated follower of fashion.
He’s a dedicated follower of fashion.

This has turned out to only involve “Open Mouth Operations” where Governor Carney and his colleagues promise to raise Bank Rate at some unspecified future date. Indeed they have done so only this morning.

all members agreed that it was more likely than not that Bank Rate would rise over the three-year forecast period

Could it be more unspecific and vague? Especially if we consider that we are at an emergency level of Bank Rate. The more I read it the weaker it looks especially if we consider what has fallen by the wayside in the meantime. Bank Rate was supposed to rise under the now redacted Forward Guidance Mark One when the employment rate declined below 7% and of course it is now 5.6%. Also remember this from June last year at Mansion House.

There’s already great speculation about the exact timing of the first rate hike and this decision is becoming
more balanced. It could happen sooner than markets currently expect.

Well ten months later with no sign of “sooner” happening we can say that Governor Carney was wrong about that too! Apparently though continually making false promises and misleading people has this effect.

Guidance encouraged businesses to hire and spend, and helped keep expected interest rates low, even as the economy recovered strongly.

Imagine what it might have done if he and his colleagues had got things right rather than wrong?

But we saw a shift as whilst FLS was reducing actual interest-rates Governor Carney was promising future interest-rate rises. We shifted from actual action to promises and hype. It remains to be seen whether cuts will be part of reality and rises only figments of imagination going forwards. Perhaps Governor Carney will go to the Isle of Wight this summer to watch Fleetwood Mac.

Tell me lies
Tell me sweet little lies
(Tell me lies, tell me, tell me lies)
Oh, no, no you can’t disguise
(You can’t disguise, no you can’t disguise)
Tell me lies
Tell me sweet little lies

Another forecasting failure

The Bank of England has another entry in this ledger and it edges forwards in the race with such bodies as the OBR and IMF to be the worst forecasting body in the world. The evidence comes from as recently as the February Inflation Report. Here is Governor Carney.

we expect the strongest real income growth in over
a decade actually…..I think the thing that we have seen in recent months is the start of the turn of wages, and consistent with the change in slack in the labour market. We are seeing tangible increases in wages.

Today we see a rather different tune.

Annual whole-economy regular pay growth on the AWE measure had fallen back to 1.6% in the three months to January and bonuses had been weak. Bank staff had revised down their expectation for annual total AWE growth in Q2 to 2.3%, from 2.6% at the time of the February Inflation Report.

Actually we are then warmed up for stagnation in wages which is a complete contradiction of two months ago. Still pretty much every base has now been covered! Also with the new view on wages exactly how and why will they raise Bank Rate?

Central Bankers as Politicans

In the current environment we are reading a lot of political statements which most take with a fair bit more than a pinch of salt. Well how familiar does this sound?

The Committee’s guidance on the likely pace and extent of interest rate rises was an expectation, not a promise.

Are these different from a “hope” or an “aspiration” or a “manifesto promise”?

Somewhere along the way giving technocrats authority over monetary policy has turned them into individuals who walk and talk like politicians. I do not mean that as a compliment! The official word for this is “independence”. One disturbing effect is that they have been able to implement policies which governments would have not been able to.

The Policy Failure

This was when inflation was allowed to exceed 5% in the autumn of 2011. Here we see another political link as this was badged as an easing of policy to help the economy. Of course high inflation does help our political establishment but it hurt our economy via its effect on real wages. Back on October 18th 2011 I pointed this out.

Last week on the 13th of October I suggested that as wage growth was slower than price inflation that real wages were falling and that this was acting as a break on the UK economy. Furthermore that this unintended consequence of all the monetary stimulus in our economy was contributing to this meaning that it was acting as a brake on itself.

These days nearly everyone is all over the real wages problem including those who supported the Bank of England in an effort which reduced them! Back then pointing out the truth was as ever a lonely road and many still fail to admit the role of above target inflation. The word redaction does not only apply to out political class.

Comment

One way of looking at the Bank of England is to use one of its favourite measures which is productivity. We find that over the Parliament its productivity on the Bank Rate front have been a big fat zero! If we move to what are called “extraordinary measures” we find that they are now ordinary in another perversion of language but that have struggled to reverse a failure of inflation forecasting. Does a panic over negative inflation forecasts sound familiar? A bit like a golfer who misses a put and soon gets a similar one to take central bankers often find that mistakes have a habit of following the advice of Carly Simon.

Coming Around Again

Along this road our central bankers have become indistinguishable from politicians and of all the brickbats I have hurled in their direction it should be the most hurtful.

Number Crunching

Tesco

How on earth did it manage this in a property boom?

includes £(4.7)bn fixed asset impairment

With losses of that size will it too get a bailout from the taxpayer?

Food Banks

The Trussell Trust has been doing a little redacting of its own today as Full Fact has challenged its claim shown below.

The latest figures published by the Trussell Trust show that over 1,000,000 people have received at least three days’ emergency food from the charity’s foodbanks in the last twelve months” – Trussell Trust, 22nd April 2015

Here is the Full fact response.

The Trussell Trust say that on average people needed two food bank vouchers annually, so the number of people using food banks is likely to be around half of the 1.1 million figure.

Still worrying but some accuracy is welcome.

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8 thoughts on “When did Governors of the Bank of England morph into politicians?

  1. I disagree about “forward guidance”.

    Surely it was never meant to be a cast iron forecast of what would happen, but merely a view of what they thought at that moment?

    Like “best practice”, it has become accepted as what should happen in all circumstances. But that is only for people who cannot adapt to changing situations. “Best practice” is not a concrete invariable rule, it is what works at the time. Similarly “forward guidance” can only be a view, which must, necessarily, change.

    The military phrase is “a plan rarely survives first contact with the enemy”….thank god, or all battles would be lost!

    • Hi Mickc

      I agree partly with you in that it was not a cast iron guarantee but if you use an unemployment rate of 7% as a level then the person involve must realise that it will be expected to happen if the unemployment rate reaches 6.5% and not only be a certainty but perhaps have company at 6% and so on. After all why set a level if it is irrelevant?

      My view is that Forward Guidance has certainly become and probably always was a policy of promising interest-rate increases without ever intending to ever do them. Under it they will remain just around the corner…

      What is wrong with the truth? If you believe they are not necessary why not make the case?

    • Micky, Yes but. Carney’s guidance was primarily meant to give borrowers some indication of the timing of future interest rate changes – because borrowers find it very difficult to adjust their debt levels in response to changing circumstances. In that respect FG is a failure.

      Sure forecasts can change. The fine art of forecasting is about determining a better forecast not the ‘right’ forecast – as anyone who has ever worked in a Marketing Dept. knows. But if they are totally wrong all the time then all credibility is lost.

  2. Great blog as usual, Shaun.

    Mark Carney is the obvious example of a central banker who has become a politician. In January 2013, while he was still Governor of the Bank of Canada, he told the UK Treasury Select Committee that he thought the UK CPI was the best British inflation measure, although he had spent his entire public career defending as the Bank of Canada’s inflation target a series that is almost identical conceptually to the RPIJ. Governor Carney allowed that the UK CPI’s “main omission is of course that it excludes housing costs for owner-occupiers, but I understand that a new index – CPIH – will be launched next year incorporating these costs. [It was launched two months later, in March.] This will be a useful development.” This sudden interest in an owner-occupied housing component based on imputed rents was a little mystifying as there was an analytical series for OOH based on imputed rents calculated for Canada from January 1982 to August 2000, and Governor Carney had never shown the least interest in having it updated. However, he could detect the political wind moving in favour of the CPIH in the UK, and responded accordingly. Now that data problems have led it to lose status, he has taken to ignoring the CPIH; I notice it wasn’t mentioned at all in the latest MPC minutes you mentioned in your column.

    As Governor of the Bank of Canada he monitored a core CPI indicator that could be considered a crude approximation to a consumer price series with a net acquisitions approach to OOH, but it seems that the Bank of England minutes have never mentioned the experimental OOH series based on net acquisitions calculated by the ONS. This is obviously a political move on his part one way or another. If he actually does believe that housing prices have no place in an inflation indicator targeted by a central bank, and it seems that he might, then he made a political decision in making no changes in the 2011 renewal of the inflation-control agreement when he had a chance to take housing prices or OOH out of the inflation indicator. If he was true to his actual views when he signed off on that renewal agreement then he has obviously made a political accommodation with the Treasury Department since then.

    Either way, I am surprised that Larry Elliott, Chris Giles and the other UK business journalists haven’t seemed to notice the glaring inconsistencies between Governor Carney’s views on target inflation indicators at different points in his career. He has never offered any explanation for the change in his views. It seems that no reporter has ever asked him..

    • Hi Andrew and thanks

      Actually both the last 2 Bank of England Governors have a case to argue on the inflation targeting front. Governor King spoke in favour of putting house prices in the CPI but when time came for action he folded like a deckchair. Whilst Governor Carney had as a new entrant the opportunity to call for change. Instead he has flip-flopped in his career as you describe. He also made something of a faux-pas when he said that the inflation expectations survey of the Bank of England was based on the RPI. Odd as it says “inflation” only if the BoE website is correct and CPI had been the official mesure for ten years.

      As to the journalists some will not understand the detail and shy away. Others like Chris Giles of the Financial Times were on CPAC when the disastrous decision to chose CPIH in its present form was made. So he must want to let sleeping dogs lie and avoid discussion of a policy error he was involved in! It is not so easy to criticise others if they are aware of the attackers own flawed past is it?

  3. Politicians and bankers are interchangeable (ask Tony Blair); the banks own them all.
    As for Carney, je’s more likely to be somewhere like Skegness watching Sandie Shaw singing “Puppet on a String”.

  4. Forward guidance was silly because it was inaccurate as you point out and it seems to have pretty much stopped other than mandatory mutterings about inevitable rate rises now and again. I begin to think that Carney is just waiting for the Fed to do something before he can act; the temptation to let another central bank blaze the trail to prosperity (we had the same idea) or ruin (it was all their fault) must be very strong. As for their inflation target mantra, it’s an open joke when they can say that they operate on these long/open-ended cycles – how many years before we get to 2% now?

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