The tectonic plates at the Bank of England are showing signs of a shift

Last night saw yet another salvo fired in the new version of Forward Guidance. This is yet another reformulation of when the Bank of England will raise its interest rate which is called Bank Rate. At a private party at Policy Exchange Governor Mark Carney reiterated what are becoming very familiar phrases. From Policy Exchange.

Carney – interest rates will likely proceed slowly, and in medium term will rise to about half the historical level.

Mark Carney tells that interest rates will start rising at end of year and go up to about ‘half historic levels’

Just for clarity “half historic levels” means of the order of 2.25% to 2.5% as I note some were pointing out that historic levels did involve 15%. Another Forward Guidance communications failure?

Also there was a sentence which will be very familiar to followers of the US Federal Reserve Chair Janet Yellen.

Path of rates is more important than when the first hike happens – Mark Carney

If he (and indeed she) is right it makes you wonder why they are going to so much effort to hint at the timing of the first hike doesn’t it?!

Why is he doing this?

The new version of Forward Guidance involves making so many promises of interest-rate rises that consumers and businesses respond to it. On that road they hope it will not be necessary to actually raise interest-rates but of course the danger is that Mark Carney is seen as the boy who cried wolf.

Of course as Forward Guidance emerges from its chrysalis one more time there is a genuine danger of this. Who can forget the first effort from August 2013 which was badged as shown below.

the Bank of England’s Monetary Policy Committee (MPC) voted to provide some explicit guidance regarding the future conduct of monetary policy.

Which was?

the MPC intends not to raise Bank Rate from its current level of 0.5% at least until the Labour Force Survey headline measure of the unemployment rate has fallen to a threshold of 7%, subject to the conditions below.

This did have an impact and as I explained on Mindful Money on the 8th of August 2013 markets did respond to this.

If we look at the contract for June 2016 which had closed at 98.42 the day before those who thought that they had the “early wire” pushed it up to 98.56 before the announcement but afterwards it plunged to 98.24. At that point UK interest rate expectations had risen by a quarter point compared to the pre announcement frenzy.

This was followed rather quickly as it happened by the unemployment rate falling below 7%. This left egg on Governor Carney’s face as whilst he and his colleagues argued that 7% was not an automatic threshold they found 6.5% and then 6% echoing in their ears. As I type this the unemployment rate in the UK is 5.6% and yet there has been no interest-rate rise.

The truth is that Governor Carney thought it would be a long time before the 7% unemployment threshold was breached meaning that his Governorship began with yet another Bank of England forecasting error.

This was followed by the Mansion House speech of June 2014. when Mark Carney told us that an interest-rate rise could happen sooner than markets expect. We are still waiting.

Why are Carney and Yellen doing this?

The first reason is that there are some effects for example currency strength gets yet another mention in today’s Bank of England Minutes.

The recent appreciation of sterling would be expected to have a direct effect on inflation, bearing down on the CPI relative to the outlook described in the Committee’s May forecast,

Also some interest-rates are beginning to respond to the upping of the mood music. From This Is Money.

Both Halifax and Virgin Money have upped the rate to 2 per cent for new savers on their two-year deals on tax-free cash Isas in the past week.

Perhaps we will see more of this which savers will welcome after a hard run where savings rates have been “Fallin'” along to Alicia Keys.

Today’s Minutes

After the hype and bombast from Governor Carney I had a wry smile as they were released and the vote was 9-0 for unchanged! However there was a hint of movement in the tectonic plates at the Bank of England.

For a number of members, the balance of risks to medium-term inflation relative to the 2% target was becoming more skewed to the upside at the current level of Bank Rate.

I think that this means that 3 members of the MPC are at least considering a Bank Rate rise. The obvious candidates are Ian McCafferty and Martin Weale with the third being maybe Kristin Forbes or as an outsider a valedictory vote at his last meeting by David Miles. Both McCafferty and Weale have past history in this front as they voted for a rise between August and December last year. Actually Martin Weale did so several years ago without success so third time lucky?

If there was such a shift why did no-one actually vote for a rise?

the uncertainty caused by recent developments in Greece was a very material factor in their decisions:

So in August they could be singing along to Lola’s Theme by Shapeshifters.

I’m a different person
Turn my world around,
I’m a different person.

What has driven this?

In essence it is wage growth and the possible impact of it on UK domestic costs.  There is a very long paragraph on wage growth in the Minutes which means that the Bank of England has occupied every position it conceivably could on it so far in 2015! But the bottom line is this.

It was evident that domestic cost growth was recovering.

I think that this is a fair point and have pointed out regularly that services inflation in the UK has fallen but only back to the target. So once the oil price fall fades out of the numbers there is a risk of inflation again.

The Problems

I have already pointed out the appreciation of the UK Pound. In the current environment there is a considerable risk that an interest-rate rise would exacerbate that. It is a feature of the credit crunch that an interest-rate of 0.75% might be considered internationally attractive but those are the times in which we live. Also a sign of the pressures came from Czechoslovakia in an annoucement on Monday.From Bloomberg.

Policy makers sold the local currency on Friday for the first time since 2013 as a four-month rally took the koruna to within 0.1 percent of 27 per euro,

As an aside did they learn nothing from what happened to the Swiss National Bank?

automatically intervene for an unlimited time and in unlimited volumes to keep the koruna rate near the level of 27 per euro.

The fundamental point is that there is now rather a long list of countries around the Euro area including some with strong economic growth like the UK who are operating monetary policy in the opposite direction to the promises we keep being given.

Also oil prices have dropped again which shifts the path of UK inflation downwards again for the next few months if sustained.

global oil prices had also declined, particularly in the days leading up to the Committee’s meeting, and stood around 10% lower than a month earlier.

As I type this we remain in that situation as the price of a barrel of Brent Crude Oil is below US $57. So we may see more domestic fuel price cuts to be added to the 5% announced by British Gas and there have been signs of falls in diesel prices at the pump too.

@stephbreakfast Just seen diesel at £1.11 a litre at a supermarket in Bromley. Anyone seen it cheaper?

In my locality I have not seen a drop like that but a local supermarket is offering diesel at 115.5 pence per litre which is the lowest for a while.


August seems likely to be a month in which we return to a situation like the end of 2014 when some Bank of England policymakers vote for a Bank Rate rise. However how much will actually change? If we consider the crucial area which is wages then today’s update from the Bank’s Agents is not massively upbeat.

Growth in labour costs per employee had been little changed.

If we look into the detail companies are seeing pay pressure but only for some.

Concerns over staff recruitment and retention were, for the most part, reflected in targeted awards at key staff, rather than higher general pay awards.

Also on the other side of the coin let us not forget that they did not know that the level of unemployment was about to rise which changes things. Or that wage growth in Many would be lower than that in April. So there is much in the mixture I think and let me throw in two other factors. Firstly the picture in the United States changed yesterday when the level of industrial production was revised down by 2.5% (2012 and 2013 both saw 1% falls). Secondly what if we move to a three-way split with Andy Haldane voting for an interest-rate cut?

Privacy and Central Bankers

This is an issue which Benoit Coeure of the ECB tripped over only recently. Governor Carney should take great care when he discusses the liquidity trap and the path of interest-rates in a speech with their being no official record of it available. I am sure it was a lovely summers evening at Policy Exchange but loose talk costs lives and all that…..


12 thoughts on “The tectonic plates at the Bank of England are showing signs of a shift

  1. Shaun,
    Adding to MPC’s irrelevance I think increases in new saver rates is linked to new internet based entrants into banking rather than Carney’s pronouncements!

    • Hi Chris

      One of the problems with economics is that there are often many things going on at the same time meaning that there are no test tube style experiments. Mark Carney will be disappointed that you put down the savings rate rise to more competition and not the power of his speeches!

      Another factor may be the rise in Gilt Yields. The 5 year yield dropped to about 0.9% in mid-Jan as the ECB QE had its initial impact on not just Euro area bonds, but now it is 1.56%.

  2. Czechoslovakia???
    Since Carney seems to believe he can talk the economy up, then perhaps ha has been hoist with his own petard; that the market is where it is BECAUSE of his previous pronouncements, and would be in a much poorer position had he not made them.
    A bit like the justification for QE.
    So now he daren’t stop, no matter how stupid he looks…and boy, does he!

    • Hi therrawbuzzin

      In essence Mark Carney has sung the same tune since he became Bank of England Governor. What is missing is any action.

      As to the Czechs I wonder if he and the Bank of England would echo the spirit of the words of Neville Chamberlain

      ” because of a quarrel in a faraway country between people of whom we know nothing.”

      Although it was bigger then as it had Slovakia too.

  3. “Concerns over staff recruitment and retention were, for the most part, reflected in targeted awards at key staff, rather than higher general pay awards.”

    So thats why MPs got a pay rise !

    And Carnival Carney will too , no doubt !

    and , oh , 5% announced by British Gas , didnt the wholesale price drop by 20% ?

    Ripped off by the Bank, HMG and the Energy companies

    Who looks after the public ?


    PS: darn it where’s me popcorn!

    • Hi Forbin

      That’s the first time I have seen MPs called “key staff”, well outside their fantasies anyway. As to the background it has been another rough day for commodity prices with oil and copper to the fore. So maybe we can hope for some cheaper prices which of course according to conventional thought are bad for us! Can I have theirs please?

  4. Great column, Shaun, as usual. Here is the last part of the May 29, 2013 interest rate announcement of the Bank of Canada, the last such announcement made when Mark Carney was still its Guv, as Evan Solomon would say. “Reflecting all of these factors, the Bank has decided to maintain the target for the overnight rate at 1 per cent. With continued slack in the Canadian economy, the muted outlook for inflation, and the constructive evolution of imbalances in the household sector, the considerable monetary policy stimulus currently in place will likely remain appropriate for a period of time, AFTER WHICH SOME MODEST WITHDRAWAL WILL LIKELY BE REQUIRED, consistent with achieving the 2 per cent inflation target.” (Emphasis added.) So Governor Carney left office hinting at another interest rate hike, something he had been hinting at or threatening since at least December 2010. However, after hiking the overnight rate from 0.75% to 1.0% in September 2010, he never changed rates thereafter. In the interval between the last rate hike and May 2013 the inflation rate was sometimes scarily high. In May 2011 it went to 3.7%, not only well above the 2% target, but well above the 3% upper bound. Governor Carney talked tough, but left the overnight rate unchanged. So I would take his current hints that he might be moving up the bank rate sooner rather than later with a shaker of salt.

    • Hi Andrew and thank you

      It is part of the modern central bankers manual that they overlook inflation overshoots. Mervyn King overlooked an overshoot in the UK which was even larger than that overlooked by Mark Carney in Canada. However the UK and US seem fixated on interest-rate rise promises and I mean promises rather than action. I note your point about Mark Carney behaving in similar fashion in Canada and whilst circumstances changed materially with the falls in commodity prices alsoI note that the next move was down (x2 so far).!

      What is also awkward for a man “who is a dedicated follower of fashion” is that a growing list of central banks (Riksbank, SNB, DNB and to some extent CNB) are moving in exactly the opposite direction.

  5. Hi Shaun

    This continuous teasing by CBs seems to me to be to encourage the view that they are in control of events and can move them when certain parameters change, To me this is complete nonsense.

    Any “forward guidance” put forward by Carney (or Yellen) is likely to be swamped by external events (the Euro, geopolitical issues ). The most noteworthy economic news I read yesterday was that the Chinese have apparently been dumping US T bonds to the tune of $0.5Trillion in the past few months, something I think is far more important than the musing of mark Carney.

    From what I can see the economic indicators in many places are moving South and I can’t see IRs rising anytime soon, either here or in the US.

    • Hi Bob J

      I agree or if they do they may have to cut them by even more quite quickly! As to events I was just discussing with Shireblogger who used to comment on here but now uses Twitter that little has changed so why has the Bank of England view?

      As to the US quite a Nelsonian style blind-eye is being turned to the significance of the industrial production downgrade which took place yesterday. Yes economic growth may be strongish in Q2 but may only put us where we thought we already were.

  6. Shaun,

    With the ONS web site showing inflation at 0%, this Governor is a fool! What the hell does he think is going to happen to inflation between now and the new year?! I appreciate oil may drop out, though I know it has drifted lower, but dear God, prices would have to shoot up drastically for inflation to go above 2%. And I hardly think that will happen when I believe commodity prices, too, have been drifting lower for months. He’s just such an idiot! And since you have told us time and again that it takes about 18 months for an interest rate rise to kick in, if he believes that inflation is going to shoot up, hadn’t he better start raising them now?! Or you’re wrong about there being an 18 month time lag, which I very much doubt. To mis-quote Gandalf in Tolkien’s book, “A fool of Carney”.

    • The BOE’s idea of “medium term” which is what they always look at when setting policy for inflation is 18 months – 3 years so when they talk about anything it’s always what they think will be happening in 18 months – 3 years.

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