Yesterday afternoon saw quite a ramping up of the Forward Guidance rhetoric from the Bank of England and in particular it saw yet more promises of Bank Rate rises. Governor Mark Carney fired the opening salvo. From the BBC.
The point at which interest rates may begin to rise is moving closer
Although as ever it came with a counterpoint that the move should it ever come would be small.
Once rates begin to adjust, we expect for those adjustments to be at a gradual pace and to a limited extent.
This mantra has become rather familiar from Governor Carney as we note that Forward Guidance has become a contradiction in terms. What I mean by that is that back in June 2014 in his Mansion House speech he stated that Bank Rate “might rise sooner than markets expect” and of course it is now July 2015 without it happening. Indeed as no MPC (Monetary Policy Committee) members are currently voting for a rise you can argue we have moved further away as previously two did.
Another front was opened in this campaign by David Miles in a speech given to the
It also comes at a time when I think the case for beginning a gradual normalisation in the stance of monetary policy is stronger than at any time since I joined the committee over 6 years ago.
I think a first move up in Bank Rate soon is likely to be right.
The time to start normalisation is soon; that is not something to shrink from.
He also gave us a suggestion as to how much they might rise.
That would give one a range for nominal r* at the start of 2018 of between about 2.5% and a bit above 3%.
That is a bit higher than some other suggestions although now we hit a problem you see whilst David may share a surname with part of a song by the Who concerning prescience he has shown the reverse.
I can see for miles,and miles and miles
Instead David Miles voted for extra Quantitative Easing just as the UK began its current growth spurt in an example of adding to the punchbowl as the party gets going. Also his importance declines as the end of his term nears as it is easy to promise interest-rate rises for others! I do hope that this is not a way of redacting and modifying his record which is one of 6 years of unchanged interest-rates.
Oh and never believe anything until it is officially denied!
One thing the MPC will not do (and never has) is just follow another big central bank; it is a daft idea that we cannot raise rates in the UK before the US and also cannot be long be.
So “daft idea” goes into my financial lexicon for these times as I and I believe many others consider that there is a lot of truth in it.
My first thought on hearing the Mark Carney rhetoric was that he already knew today’s wage numbers ( he gets them at 9:30 am the day before). So let us see if they backed him up.
Comparing March to May 2015 with a year earlier, pay for employees in Great Britain increased by 3.2% including bonuses and by 2.8% excluding bonuses.
As you can see there is a welcome improvement which also translated into a considerable improvement for real wages too.
Comparing the three months to May 2015 with the same period in 2014, real AWE (total pay) grew by 3.2 per cent, the highest rate of increase since July to September 2007 when it rose by 3.3 per cent.
So this is the best performance in real wage terms in the credit crunch era in quarterly terms.
The single month of May was also good if not quite so strong. Total wages grew by 2.6% and we know that CPI inflation was 0.1% so we had real wage growth of ~2.5% in May. So also strong albeit on a single month basis there is a sign of a dip.
Today’s data had a hint of an improvement here too as shown below.
Total hours worked fell 0.2% in Mar-May, as employment fell. NIESR says GDP rose 0.6%. Implies productivity is finally rising. ( H/T Chris Dillow )
Some Perspective On Real Wages
Lest we get carried away on the real wage front there was an interesting number on the subject in the David Miles speech.
real wages are probably around 20% below that trend. ( he means pre credit crunch trend).
We have a new official series for this published today and if we set the benchmark at the beginning of this century or the year 2000 at 100 we saw for a while happy days as the index rose to 118.1 pre credit crunch. But in spite of the recent improvement we are now at a relatively measly and lower 111.5. Not much growth for 15 years is it?! Hence the issues over the cost of living.
Another factor which can be added to this is that even such a poor result has been flattered by the use of the official inflation measure in the UK the CPI or Consumers Price Index. It was only yesterday I was pointing out the gap between it and the RPI or Retail Price Index. So real wages growth is currently 1% lower if you use that measure. Also the total real wage growth number will be weaker.
What about employment and unemployment?
For the first time in a while the UK has seen a reversal on this front.
Comparing March to May 2015 with the 3 months to February 2015, the number of people in employment fell by 67,000 (to reach 30.98 million), the number of unemployed people increased by 15,000 (to reach 1.85 million).
I had already mentioned in passing the fall in hours worked.
Total hours worked per week were 995.6 million for March to May 2015. This was:• 2.3 million (0.2%) fewer than for the 3 months to February 2015 (the first quarterly fall since February to April 2013).
They are still up on a year ago (0.8%) but we have seen a more recent retracement.
If we move to the single month estimates for May we get a confusing picture. Firstly we see a rise in unemployment.
The single month estimate for May 2015 shows an increase of 0.1 percentage points on the previous month.
But we also see a pick-up in employment!
The single month estimate for May 2015 shows an increase 0.3 percentage points on the previous month.
As the soap called Soap put it ” Confused? You soon will be!”
There is much to consider here with the Bank of England yet again ramping up the mood music on a Bank Rate rise. This gets an initial confirmation from the quarterly wage growth data although this fades a little if we look at the latest month of May. But then we face the issue of them potentially raising Bank Rate into an unemployment rate rise! I suspect we remain in an era of, with apologies to Carly Rae Jepson to ” We (would) really really really really really really like to raise Bank Rate” but what with rising unemployment we cannot. Or as it was put in the comments section yesterday FG stands for Forward Gullibility.
If we move to an external perspective then we see also a phase where the UK Pound has been strong. Yesterday the effective exchange rate was 93.28 compared to the low of 77.9 in March 2013. Putting that another way it can be considered equivalent to just under a 4% increase in Bank Rate over this period. It of course impacts on different economic sectors and welcome in a way to British economic history!
Looking internationally the Swedish Riksbank has published its monthly meeting minutes today and it has a similar situation to us.
GDP is expected to grow more rapidly than normal in the years ahead and the labour market continues to improve.
Yet they cut by 0.1% to -0.35%. Can we raise Bank Rate in such an environment? I worry about that and I am someone who would like it higher to help rebalance our economy. Back in 2010 when I argued for this an opportunity was badly missed.
UK and Greece
The UK runs the risk of being dragged into the Greek bailout via the bridge financing required. As Euro area mechanisms have the turning circle of a supertanker eyes have turned to the European Union emergency fund called the EFSM. From Peter Spiegel of the Financial Times.
However the scale of use does have a limit because of the 60 billion Euros potentially available only around 13 billion currently are as the rest was deployed in Ireland and Portugal.
Supposedly this had all been ruled out in 2011 as after all we and the other non Euro nations have had nothing to do with the bailout terms and negotiations. What could go wrong with a deal that nobody actually seems to believe in?