After a day when Super Thursday was to be found at Trent Bridge, for fans of English cricket at least, rather than the hyped Threadneedle Street the Bank of England has been on the wires early today. You might think that the opportunity to speak for an hour to the world’s press would give them plenty of time to get their message over. But Deputy Governor Ben Broadbent was up early to be on Radio 4 Today on the BBC which it has reported as shown below.
We [the MPC] are responding to things that are essentially… unpredictable.
“And that means that it would not just be impossible, it would be foolish to pre-announce some fixed date of interest rate changes.”
It is true that the MPC (Monetary Policy Committee) does find things unpredictable as yesterday saw yet another version of what it thinks wages will do in 2015. It has now occupied at some point just about every position possible on that front and we have only just entered August! But as I am sure many of you are already thinking Ben Broadbent is contradicting the Governor Carney. After all does not Forward Guidance mean the opposite of this? It was badged as allowing people to adjust their expectations about what the Bank of England will do. Also Mark Carney has done exactly the opposite in his speeches. Below are some excerpts.
The Governor will add that, in his view, the decision as to when to start such a process of adjustment will likely come into sharper relief around the turn of this year. (Lincoln July 16th)
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. (Mansion House June 2014).
This subject has arisen because of a good question yesterday from Siobhan Kennedy of Channel 4 news. She compared what Governor Carney had said at Lincoln to what the Bank of England was saying yesterday.
The two things seem a little bit confusing.
Governor Carney looked annoyed and replied.
First thing, I recommend reading the actual speech because I didn’t say….
This is really rather poor as he knows that his speeches are scoured for hints of policy moves and that central bankers speak in euphemisms and a type of code that needs translating, a bit like Klingon for Star Trek fans. Anyway I can put “entirely consistent with what I said” in my financial lexicon for these times and suggest that Mark Carney improves his speech writing efforts so that he does not get misinterpreted.
What about the UK Pound £?
This brings me to another effort this morning from Ben “pinocchio” Broadbent who is being widely quoted as having said.
Sterling Strength Is Down To UK Economy
Some of that is true but it is also true that the Bank of England’s and in particular Mark Carney’s rhetoric about interest-rate rises has also pushed it higher. This is especially relevant in a world where many of our near neighbours have been cutting interest-rates often to negative levels.
The problem that is trade
The reason why the Bank of England is trying to “interpret” matters on this front relates to the UK’s persistent trade and balance of payments deficit. Also we have the issue that we were supposed to be rebalancing towards areas like manufacturing when in fact as yesterdays data pointed out we are still rebalancing away from it. So we have numbers like this morning’s.
The UK’s deficit on trade in goods and services was estimated to have been £1.6 billion in June 2015, compared with £0.9 billion in May 2015.
If we look to the quarterly numbers for a little more perspective we see this.
In quarter 2 April to June 2015, the UK’s deficit on trade in goods and services was estimated to have been £4.8 billion, narrowing by £2.7 billion when compared with quarter 1 January to March 2015.
It is heartening that for once the UK deficit in this area has improved but the underlying theme here is deficit after deficit after deficit. Decades of them in fact and HM Parliament puts it thus.
The UK has had a current account deficit in every year since 1984, although its recent size, both in monetary terms and in relation to the size of the economy, is unprecedented in peacetime.
2014 saw some disturbing numbers because in addition to the persistent issue with trade in good and services the UK saw a sharp deterioration in its primary income position.
The main factor behind the worsening current account position has been a growing primary income deficit, which moved from a £19bn surplus in 2011 to a £39bn deficit in 2014.
So our position which was vulnerable after years of trading deficits has got a further push from our income position. This is a difficult issue as we mull the consequences with thoughts about us being increasingly dependent on foreign funding. It is made more awkward by the fact that investor view such things in binary fashion or to put it another way it will not matter until it does! When that will be is unknown.
Even Mark Carney has been troubled by developments here.
Nonetheless, sustained borrowing from abroad to consume at home is hardly a recipe for a balanced and sustainable expansion.
Although of course I suppose we now have to ask him if he meant something else….
Even worse is the state of play in UK trade statistics which I have discussed before. It is simply unacceptable to put this next to our services numbers which after all represent some 78.4% of our economy.
However, the information on trade in services is mainly obtained from quarterly surveys, in some cases underpinned by larger annual surveys. That means that the data for the latest months are inevitably uncertain.
Even the official view of reliability here has had a hiccup.
Due to a series of errors during 2014, the UK Statistics Authority suspended the National Statistics designation of UK Trade on 14 November 2014.
This is tucked away a bit rather unlike the way that “not a National Statistic” is stamped all over any reference to the RPI.
A ray of light
There have been some rays of light in the recent trade figures.
At the commodity level, the rise in exports reflects a £1.3 billion increase in exports of chemicals and a £1.0 billion rise in exports of fuels. Exports of machinery and transport equipment rose less significantly than chemicals and fuels over the quarter (up £0.6 billion), but accounted for £1.2 billion of the overall narrowing of the goods deficit as respective imports fell by £0.6 billion.
The numbers for chemicals have at times been contradicted by the output levels there but we appear to be exporting more chemical products to the United States which is one of the few places we have a surplus with. The situation regarding fuel is a little murkier as the rise in North Sea Oil & Gas has been driven by tax changes but it is an improvement nonetheless.
However on the other side the only positive spin that can be put on this is that we do not get the credit for the economic boost that we provide to our neighbours in Europe.
This increase in imports results in a record trade deficit with the EU of £7.6 billion for June 2015.
The Bank of England is having a difficult time which is odd when you consider that the solid economic growth and low/no inflation being reported would not so long ago have been reported as an economic nirvana. Speaking of Nirvana perhaps Governor Carney feels he has been getting this message from the media.
Here we are now, entertain us
The problem is that when he has hit the headlines about interest-rates we now find that we get interpretation as we see ch-ch-changes leading to the criticism that he is following Kylie’s advice on interest-rate forecasts.
I’m spinning around
Move out of my way
All this comes as something of a critique of the claimed transparency of the new regime as if it is so transparent why is everyone misinterpreting it?
Also if we return to the unbalanced nature of the UK economy we have seen the Bank of England act to reduce mortgage rates and thereby pump up the housing market. In more recent times it has talked up the UK Pound so it has operated in the opposite direction. No wonder it now wants to “interpret” things. After all for all the talk and hype about tightening what we actually saw yesterday was a small Operation Twist style ease of policy.
Consistent with the Committee’s forward guidance, and as described in a market notice accompanying these minutes, the Committee agreed to re-invest the £16.9 billion of cash flows associated with the redemption of the September 2015 gilt held by the Asset Purchase Facility.