One of the economic themes of 2015 has been disinflation as we have seen consumer inflation fall across most of the world and sometimes fall into negative territory. Another example of that has been seen this morning as consumer inflation in Tokyo fell to an annual rate of -0.1%. However there have been areas as I have been recording in recent days of asset price inflation (particularly house prices) which has been exacerbated by the loose monetary policy being deployed by the majority of central banks around the world. Of course the falling headline rates of inflation have encouraged even looser monetary policy as we saw from Norway yesterday.
Norges Bank’s Executive Board decided to lower the key policy rate by 0.25 percentage point to 0.75 percent.
This also came with a clear hint that it would not be feeling lonely.
The current outlook for the Norwegian economy suggests that the key policy rate may be reduced further in the coming year.
So yet another central bank cutting interest-rates in 2015 which I think makes 40 for this year but it is hard to keep up! Meanwhile on the interest-rate rise side of the equation we seem to be getting promises via Forward Guidance instead. From Janet Yellen of the US Federal Reserve last night.
Most FOMC participants, including myself, currently anticipate that achieving these conditions will likely entail an initial increase in the federal funds rate later this year, followed by a gradual pace of tightening thereafter.
If the interest-rate rise is as small a deal as they keep telling us then why did they not do it last week? Regular readers will be aware of my view that Forward Guidance currently involves promising interest-rate rises to hopefully change expectations and markets thus making the actual rise unnecessary. So if you like she is the girl who cried wolf and Governor Carney of the Bank of England is the boy who cried wolf.
Asset Price Inflation
This provides a problem if the previous weapon of interest-rate rises is unavailable. On that note we have yet another message from the land of the rising sun as it was 20 years ago this week that the Bank of Japan cut interest-rates to 0.5% a level they have yet to exceed. In fact interest-rates there are pretty much zero or if we look at the latest estimate of average deposit rates in Japan 0.02%.
Central bank inflation
One area where there is plenty of inflation is in well paid jobs for central bankers which is a trend that is booming under the current Governor Mark Carney. However even before he arrived the UK establishment formed a Financial Planning Committee back in 2011 as an interim measure. Presumably because the bureaucratic response to a policy failure (inflation was about to go over 5%) is of course more bureaucrats! Oh and i do not know if he drove it but on Governor Carney’s watch this happened to salaries.
In February 2014, the Committee reviewed, in the light of experience, the time commitment involved for the members of each of these committees, and decided to increase the fees of an FPC external member to £90,698p.a., and of an Independent member of the PRA Board to £102,326p.a.,
That was an increase of 17% for the FPC and 32% for the PRA. Good to see the Bank of England doing its bit for real wages isn’t it?! Oh and with inflation according to the CPI measure which they tell us is best at 0% so far in 2015 then we have seen another nudge up.
For 2015/16, these fees were increased by 1.5%.
Perhaps Ben Broadbent of the Bank of England was referring to them in his speech on the changing composition of the UK workforce. We have higher wages but where is the productivity?
What does the FPC actually do?
I am afraid that the following is the written equivalent of something of a mouthful.
The Committee is charged with a primary objective of identifying, monitoring and taking action to remove or reduce systemic risks with a view to protecting and enhancing the resilience of the UK financial system.
What have they said today?
The opening salvo is in central banker speak.
Overall, the FPC judges that the outlook remains challenging.
Really? Anyway let us look for specific examples.
The UK current account deficit remains close to a record high.
I agree that this is a risk so what are they going to do about it?
Although the capital flows financing the deficit remain mostly long-term in nature and do not give rise to material mismatches, the Committee will continue to monitor closely risks associated with the current account.
Ah okay nothing! But they have protected their backs should it blow up in future. Note I said their backs not ours..
UK housing market
Again we get something of a warning and it comes with an expectation of worse to come.
In the United Kingdom, house prices continue to rise faster than incomes, with forward-looking indicators suggesting that house price inflation will pick up further in the near term.
This was backed up by this weeks data from the British Bankers Association.
Gross mortgage borrowing in August was £12.2 billion. This was 14% higher than a year ago and the largest increase since 2008. Net borrowing of £2.0 billion was the highest monthly rise since August 2010.
If my role was financial stability then I would be concerned that mortgage lending and house prices were surging ahead of the economy but business lending was stagnant. But apparently officially everything is fine.
The Committee judges that the insurance provided by its June 2014 housing recommendations for the owner-occupier market remains warranted.
What about buy to let?
The FPC points out that it has been on the march.
The outstanding stock of buy-to-let mortgage lending has increased by over 40% since 2008. Over the same period, the stock of owner-occupier mortgage lending rose by only 2%. The share of buy-to-let in the stock of outstanding mortgage lending has risen to 16% from 12% in 2008.
What it does not do is point out the role of the Bank of England in this. After all from July 2012 it drove house prices higher via its Funding for (Mortgage) Lending Scheme or FLS which meant that house prices became ever more unaffordable. That is plainly a challenge to future financial stability. There is no mention either of the UK becoming more of a rentier style society or of the economy being tilted towards the housing market one more time.
Help To Buy
Governor Carney and the FPC have written a formal letter this morning on this subject and the crucial sentence is below.
Under current market conditions, the Committee assesses that the scheme does not pose material risks to financial stability.
Can you see the swerve? It says that it is fine but should it go wrong they will blame “market conditions”. So it is pointless in reality. Oh and this bit is interesting.
While the share of high LTV lending has picked up slightly over the past year, it remains low relative to the level before the crisis.
“The crisis” is hardly a benchmark unless we intend to plunge over the same cliff. Also it begs the question of why high LTV (Loan To Value) mortgage loans are required? My contention would be that a major factor is that house prices are too high and in particular they are too high relative to incomes.
The FPC is worse than the dog that didn’t bark as it promises a bite but does not deliver it. It provides plenty of platitudes and words its Minutes so that should there be a future collapse it can say that it warned us but what does it actually achieve? My contention is that it is part of the central banking theme to claim that they are not “maxxed out” with policy options. As the UK has not and seems very unlikely to use the interest-rate weapon against asset price inflation then the central bank has to offer something else. Or at least appear to offer something else because macroprudential policies were abandoned in the past because they did not work.
This is a trend way beyond the UK as macroprudential polices are spreading as central banks come to a similar conclusion. The taxpayer is paying for more bureaucrats who then spend their time giving us open mouth operations.