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
@Policy_Exchange 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.
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.
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.
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…..