The Bank of England FPC is like the dog that barks but has no bite

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.


24 thoughts on “The Bank of England FPC is like the dog that barks but has no bite

  1. Hmm, sometimes history can help us

    Efforts to revive the Byzantine economy only resulted in inflation and a debased gold coinage. The army was now seen as an unnecessary expense

    sounds familiar?


    • And its not as if any country hasn’t been here before

      our gold was oil….

      and so history lesson #2

      The Spanish tax burden was very unevenly distributed: it fell more on the poor than the rich…..

      they spent over 40 million ducats on the Low Countries’ wars alone (a ducat is a small gold coin weighing about 3.5 grams.)

      ( we’re involved in wars that cost us today )

      To cover the shortfall, the Spanish government both borrowed money – by the issue of juros (interest-bearing state bonds) – and assigned the revenues from future years to the bankers if they would pay the defense contracts for the present year.

      By 1607 the government had a debt of almost 23 million ducats and had assigned away all its revenue for four years ahead.

      By 1644 the crown’s income was pledged to 1648; and by 1664 the crown owed more than 21 million ducats.

      Lacking any real money the government periodically had to pay the interest owed on the juros by issuing more juros – but people were not overly keen to buy these new juros since they were none too confident that the interest would be paid.

      The Decline of the Spanish Empire

      Income must pay off debt , not more debt for that is the road to madness and poverty

      As others have noted , the assets cost too much for anyone to pay off so in the end a reset is needed

      bang goes the pension pots – oh I forgot we’re already syphoned them off to bail out the Banks …….

      Will no one rid us of these turbulent priests?


  2. Hi Shaun

    The BOE, in company with other central banks, have painted themselves into a corner and cannot get out. As you imply they are unwilling and unable to increase IRs because of the high public and private debt; this is the reality we live in. We live in a Ponzi economy, where growth is spending borrowed money on consumption and this can only continue if the price of that money is low.

    It is ironic that since 2008 we have such “innovations” as the FPC and yet, on any remotely sensible assessment of the position, we are in a much more precarious position now than then, with far higher levels of debt, so in my book they have achieved nothing and will never do so because the political, cultural and social background will not permit this.

    You are right to criticise high LTV loans on property but this is the only way the game of musical chairs can keep going and it will go to the stage where folk cannot borrow any more at which point I suspect government will pick up the baton with Help to Sell 2,3,4… (BTW we are only two or three years away from the misselling scandal that will come when the tax free loans under the existing HTB come to bear interest and ultimately repayment – I wonder how much of these loans will be written off – an indirect funding of the bonuses of house builders management). As you imply it will all come crashing down eventually as you can only kick the can down the road so far. I wonder what the FPC will say when that happens or perhaps they were out to a very expensive lunch!

    • agreed , and add to that scandal will be The Great Pensions Swindle as many can withdraw cash ….

      aid to boost the economy ? or inflate houses again as pension go into MIRP returns

      HMG regulations authorities are all bought and paid for by the Banks

      Fox / chicken house comes to mind . Good god ! ,cant they see these people cannot be trusted ( well trusted to do one thing !)


  3. Hi Shaun

    Great article as always.

    Bob J is right, they cannot rise interest rates as it will destroy the economy. instead they’ve let houseprices go out of control which will eventually destroy the economy. Stuck between a rock and hard place.

    One thing which really annoys me is that we the tax payer have a limit on our pension pots, and the amount we can contribute. And yet this does not apply to the FPC. Incompetant Merv walks away with a 7.5m pension pot. One rules for the tax payers, and another for the public sector,

    • There are NO rules for the establishment.
      Do you think, for example, that Lord Sewer would have resigned from the house of shame without incontrovertible evidence that he snorted illegal drugs from between the breasts of harlots?
      Yet, even though he was FILMED doing just that;
      That’s why so many paedocides and paedophiles are protected unto death by the establishment.

      • Hi Foxy

        There are plans for a new pension scheme for judges and you may particularly enjoy the last sentence from the Workplace Savings and Benefits Website.

        “Judges are taking collective legal action for what is understood to be the first time in a bid to block reforms to the judicial pension scheme.
        The reforms were proposed during the coalition government and will see younger judges taking a significant hit to their pension entitlements.
        According to a report in The Times, around 200 judges will contest the changes claiming they amount to age discrimination.
        However, questions have been raised about how unbiased a judge could be when hearing the case.”

  4. Excerpt from History Of The Decline of England Early 2nd Millienium

    ( attributed to Forbin )

    In England high social status was closely associated with leisure. Work – particularly manual labor or Industry – was considered undignified and demeaning. Even the declining middle classes who became wealthy tried to buy land and titles and invest in Government bonds, so that they would no longer have to work for a living.

    Large numbers of English entered the banking system. Others spent long years in college education – hundreds of new universities were founded or converted from technical colleges during the 21st century. This increased the proportion of English in economically unproductive activities.

    Political commentators bemoaned the inverse correlation between productive work and high status, but could do little to change such a widespread social attitude.

    The prevalent contempt for retail trading, services and industry was reinforced by its associations with England’s ethnic minority groups – east Asians , Africans and even east Europeans ( Poles seemed the exception) …


    ( ok I ripped this off articles by J.P.SOMMERVILLE )

    but is this not close to the matter?

  5. These inflation statistics are suspiciously good, almost too good to be true, just like VW’s diesel emission statistics that miraculously passed the EPA tests.

    Questions are how to prove these statistics aren’t reliable and where to find someone to take these concerns seriously …. I note that it took months before any US regulatory authority took notice of the emission science.

    • Hi ExpatInBG

      True but at least in the Blatter (FIFA) and now VW diesel emissions scandal the US did something. These are issues which are a bigger deal in Europe so what were the European Union doing?

      As to our own numbers I did my bit yesterday by replying to the Bean Review of UK Economic Statistics and yes top of my three suggestions was reform of UK consumer inflation methodology and infrastructure.

    • Hi Forbin

      That is why they are so keen on inflation! These days even 2% per annum is not enough for some who feel that 4% should replace it. Putting it another way the money may start to run out in real terms but in nominal terms they have plans for there to be plenty.

      Of course the weakest lose the most from this.

  6. Strangely enough, Osborne’s proposed Fiscal Charter and the Long-delayed, much diluted Banking Regulation are both set to take effect in 2019.
    Does Osborne believe that the bankocrats will have thrown enough taxpayer’s hard-earned at the spendthrift wasters on whom, if their political toadies are to be believed, are essential to our well-being, over the preceding decade, to have them solvent again?
    I believe we may have a date for the next IR rise.

    • Actually to say of the the Fiscal Charter that it is a gimmick is to dignify it; I think it’s an absurdity and typical of GO political game playing. It will disappear without trace.

      As to the banks being solvent by 2019 I think this most unlikely. According to many commentators they need a capital cushion of between 20-40% and most stand no chance of meeting this before 2019, although having said that there is a fair chance that, after the next bust, they will have to undergo some sort of restructuring which may well result in the ratio improving. It will not improve by management action, however.

  7. The FPC’s pretence that it has just noticed that buy-to-let is inflating the housing market is 10 years too late to fool anyone. It’s frankly an insult to the intelligence of everyone struggling to get on the ladder.

    However, B-T-L is not so much an effect of the BoE’s actions, although the general effect of low interest rates clearly affects the market. It is mostly the social effect of legislation designed to make BTL viable by removing tenants’ rights to, well, tenancy. By allowing landlords to turf anyone out at the end of short contracts (and three years is now regarded as a long rental contract), housing becomes an attractive investment – get the mortgage interest paid by the tenants, then flog the property and pocket the capital growth. Repeat ad infinitum.

    This has a knock-on and self-reinforcing effect in that it makes renting unbearable in the long term as there is absolutely no security for the tenants who live in fear of being made homeless on a month’s notice every 6 or 12 months (depending on their current contract). So, many more people want to buy; which pumps up demand and prices, making BTL a more attractive proposition and so the cycle eventually spirals out of control. Unless the FPC are completely retarded, they’ve known this for years.

    The most favourable interpretation of their comments this week is that they are trying to put in place a body of opinion that some politician can draw on to push for rental reform, since they themselves have no actual political power. But the Tories’ fetish of home ownership is in as full a flow as it has been for a century, and Corbyn doesn’t need telling. Perhaps they’re expecting a LibDem comeback; that would fit with their general record of knowing what’s going on.

    Which all makes me wonder about all the “demand” stories we hear. Is it real demand, as in “there are people living 6 to a bed” demand or “we have to get out of renting” demand. Probably a bit of both but the research seems strangely patchy as to where the balance point is; there certainly are plenty of empty houses around the country – just not so much in the south east.

    The housing market is the biggest threat the economy has in the medium term, I think. Everyone knows that prices are outpacing wages and that sometime between today and the day that the average house price reaches £1m, something must give. But no one is making a serious effort to do anything about it because they’re all afraid that it’s too late – that ANY correction in the market will bankrupt so many households that they’re just trying to stave the day off until they personally are out of office and can’t be blamed. They’ve balanced the economy just long enough to be sitting in the living room reading the newspaper when the crash in the kitchen comes and they can say “Nothing to do with me; I’m just sitting here”.

    “There is a house in New Orleans
    They call the Rising Sun
    And it’s been the ruin of many a poor boy
    And God, I know I’m one “

    • I think the Tories may well rue winning the election because I think it’s odds on for another bust before 2020 and they will be unable to blame it on Labour. I also think that, despite what we are told, the central banks will lose control.

      When people like Haldane start musing about seriously negative interest rates and block chain technology, without giving a passing thought as to what people will actually think (and do) about this, you know the end is getting near.

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