Has Iceland shown Mark Carney and the Bank of England the way?

Tomorrow is what has become called “Super Thursday” for the Bank of England. This is where its latest policy decisions and meeting minutes are released with the Quarterly Inflation Report at 12 pm. According to Bank of England Governor Mark Carney this is more transparent which my financial lexicon now defines as swamping people with so much information that they cannot possibly digest it thoroughly. Although those invited to the Bank of England early will of course have a head start and let us hope that it has not been behaving like the European Central Bank. From the Financial Times.

ECB officials met bankers before key decisions, copies of their diaries reveal.

Also the policy decision will be made today as it is only the public announcement that is delayed until tomorrow so let us hope that nobody is more equal than others in the meantime. On the subject of transparency there are plans for another “improvement” which will reduce the number of meetings from 12 to 8 which as I have pointed out before is something of an irony when you consider it berates other organisations on the grounds of productivity.

What will they be discussing?

The first issue will be economic output where they will find themselves having to repeat what they did in September’s Minutes.

Bank staff had lowered their estimate of Q3 GDP growth to 0.6% from 0.7%.

As it turned out to be 0.5% then UK economic growth has underperformed their expectations as did growth in the United States ( they expected 2.4% annualised there). The UK annual rate of growth of 2.3% is solid but also as bit weaker than it was and below expectations. Accordingly they open with something of a downgrade.

There was also something to note in the breakdown of UK economic growth.

while output in manufacturing and construction is estimated to have fallen in the 3 months to September 2015.

Looking Forwards

This month’s purchasing managers reports have been very bullish for the UK economy. They opened with a very positive manufacturing report.

The start of the final quarter saw the UK manufacturing sector record its best month of output growth since June 2014,

This was followed by construction being strong at 58.8

the latest survey marked two-and-a-half years of sustained output growth across the UK construction sector

Then services too although perhaps the overall report was allowing for the fact that it can get over optimistic.

The survey data point to GDP rising at a quarterly rate of 0.6% at the start of the fourth quarter, up from 0.5% in the third quarter.

So the outlook is bright but there are issues here. For a start the manufacturing theme has supposedly completely changed from struggling due to currency strength to boom. We heard the British Chamber of Commerce on the struggling theme only yesterday Then of course there is construction where personally I have so little faith in the official numbers I am counting cranes! So better maybe. Let’s hope so.

On the subject of the British Chamber of Commerce you may like to note that I read the speech which said that exports were up over the past 6 years by 25% outside the EU and 6% within. Now here is how BBC Radio 4 Today reported it.

UK exports have fallen to their lowest level for six years. Joe Lynam presents.

Monetary Policy

Here we have had an unchanged Bank Rate for over 6 years and bond yields are maybe slightly higher than for the last Inflation Report. So any change comes from the exchange rate of the UK Pound £. Here the early thoughts will have been redacted as the UK Pound £ has regained ground. This is mostly due to the promises of Mario Draghi which have moved the Euro exchange rate from 1.36 to 1.41.

As a reminder the only actual tightening of monetary policy in the UK has come from the rise in the value of the UK Pound £ which under the old rule has been worth a 3.75% rise in Bank Rate since the nadir in March 2013.

Some Perspective

Yesterday’s Office for National Statistics Economic Review offered some food for thought for the Bank of England.

this extends a run of 11 consecutive quarters of positive quarterly growth during 2013, 2014 and 2015. GDP has risen by 13.3% compared to the trough of the economic downturn in Q2 2009 and is now 6.4% higher than the pre-downturn level of output in Q1 2008.

That is pleasing although of course some of that represents a population increase. As we move to look at wages it looks as if the ONS is trolling the Bank of England.

Growing evidence of tightening in the labour market has been accompanied by a sharp rise in the rate of earnings growth, driven in part by a sharp recovery in private sector earnings growth.

Such signals in the past  would have had the Bank of England reaching for the Bank Rate trigger. Although these days we wonder If they can still remember where it is! However again adding a bit of perspective changes things a bit.

Whole economy real earnings are now 5.1% below their 2008 level, while earnings in the financial, manufacturing and retail industries are now 2.5%, 3.0% and 2.1% below their 2008 levels respectively.

Just as a reminder the numbers would be worse with the various RPI alternatives and it is interesting that the ONS only gives us sectors doing better than the mean.

Also this bit gave me a wry smile. As I head towards my sixth anniversary online I recall the “rebalancing” promises of the then Bank of England Governor Mervin King.

While the output of the services industries is estimated to be 11.1% above its pre-downturn peak, the manufacturing industry remains 6.3% below this yardstick.

Perhaps one day Baron King of Lothbury will let us know how that went! Oh and I guess some of you are thinking of “march of the makers” at this point too. It seems the higher the volume of the rhetoric the worse prospects are.

There has been something of a rebalancing as the ONS in what it calls an “experimental nowcast” is beginning to catch up with something that has been a long-running theme on here.

These trends have helped to lift median real income for retired households from 66% of median non-retired household income to just over 75% between 2008/09 and 2014/15.


Of course officially there isn’t any as 2015 has seen the official reading be pretty much 0%. Starbucks have joined the fray as Twitter has been full of complaints of a price rise of the order of 15 pence for a cup of coffee. You see this illustrates how the UK remains a nation with institutionalised inflation as pressure from rents and wages overruns the commodity disinflation of a 25% fall in coffee prices on the exchanges over the past year. Optimists amongst you may be hoping that Starbucks is raising some money to pay its corporate taxes…..


We have had plenty of hot air from Bank of England Governor Mark Carney on the subject of Bank Rate rises since he started his Open Mouth Operations at the  Mansion House speech of June 2014. This has qualified him as an interest-rate hawk for Bloomberg which is curious for a man who is yet to actually vote for one! As he has decided to pontificate on climate change there is something of an irony in all the hot air produced. These are promises Eric Clapton style.

La la, la la la la la.
La la, la la la la la.

Meanwhile if the Governor looks north to Iceland he will see that yet again they have decided to be different.

The Monetary Policy Committee (MPC) of the Central Bank of Iceland has decided to raise the Bank’s interest rates by 0.25 percentage points. The Bank’s key interest rate – the rate on seven-day term deposits – will therefore be 5.75%.

Their economy is indeed running hot – domestic demand growth is running at around 7% – so by no means an exact comparison. But of course some will be thinking of Greece at this point which has followed the opposite path and look where it is.

In terms of numbers let me offer a thought which is that it is symptomatic of where we find ourselves that in both the UK and US a 0.25% rise in interest-rates is considered such a big deal. Back when we were ejected from the ERM in 1992 the UK announced Base Rate increases as it was then of 5% in one day although only 2% ever happened.

Number Crunching

You might like to file this section under up is the new down.

Pete Comley who you may recall I helped with some advice on his book on Inflation a couple of years ago has successfully challenged the ONS on rather a basic point.

On September 1st, ONS published the results of a trial to scape food prices daily from the internet . These resulted in headlines such as: “costs rocketing;”cost of basic items has risen by 8% in last year”; and  “spaghetti up 20% in a year”. Yesterday, ONS put out a correction saying that they had got the scale inverted and that food prices had actually fallen by 3% a year – a figure now almost the same as the -2% decline in prices seen in CPI.

Or as Paloma Faith put it.

I tell you what (I tell you what)
What I have found (What I have found)
That I’m no fool (That I’m no fool)
I’m just upside down (Just upside down)


11 thoughts on “Has Iceland shown Mark Carney and the Bank of England the way?

  1. Hi Shaun

    I think you’re being a little unfair on Carney when you contrast now with the 1992 ejection from the ERM. The fact is that today we have a far higher level of debt, both public and private, so the impact of a rise in IRs is that much greater, indeed arguably unacceptable.

    We have an economy which rests on the motive power of debt and I think that the BOE will be very reluctant indeed to increase IRs, whatever the inflation or earnings indices tell us. Any increase will preempt incomes which means it cannot be spent and if it is not spent then down goes the economy – and, as a collateral effect house prices and the financial markets, the emerging two great no-noes of economic management these days.

    The fact is that debt resists the sever ebb tide effects of demographics, globalisation and automation and, one day, it will dawn on people that you cannot “fix” these things with monetary policy; they are structural issues that call for structural remedies.

    • Shaun, I’d be most grateful if you would run your eye over this and tell me what you think. If you think there is another explanation, I’d be most interested to hear it:

      Between us, my wife and I have had SIX more offers of interest free loans from banks, THIS WEEK.
      One each from Barclays, one each from M&S Money, I’ve had offers from Tesco bank and Virgin money.
      The offers range from 16 months at 1.9% fee, to 24 months at 3% fee.
      Given that the number of interest free offers is now into double figures in the last fortnight, I’m absolutely certain that the purpose of these offers is to discourage me from spending any of my savings over the Christmas period.

      As I have already posted, my banks are offering 3% to 4% on current account balances, the proviso being that a certain balance is kept in order to qualify.
      This lower limit is £3k with one bank and £4k with another, and there are upper limits too.
      (The upper limits are to encourage deposits in longer-term products.)
      This, imv, means that banks are encouraging the use of current accounts as Instant SAVINGS vehicles, (policy absolutely divorced from pre-2008 behaviour) as it encourages the MAINTENANCE of these balances, not gradually dwindling as the pay period progresses.
      The only answer I can come up with, is that banks, (possibly acting as a complex monopoly) are desperate to keep deposits because of fractional reserve lending rules.
      If a bank has £7k of my deposits, it can lend £100k on them.
      Provide me with £7k interest free credit, and if I keep my £7k deposits it can lend another £93k on them.
      Better still, provide an opportunity to re-invest that loan at a profit, and another £100k can be loaned, all at better returns for the banks.

      Shaun, as a professional economist can you think of any alternative reason for those banks’ behaviour?

      • Hi therrawbuzzin

        You made me look it up so for the benefit of others here is the Virgin Money example.

        “0% for 37 months on balance transfers, with a fee of 2.59%
        Move a balance from another credit or store card and get 37 months 0% to pay it off.
        0% for 37 months on money transfers, with a fee of 4%
        Pay money into your current account from your credit card to pay off other debt you may have elsewhere.”

        Some years ago a colleague of mine then got a years interest-free credit on something he had bought. He thought why not as we were not in the ZIRP era yet? He wondered about it and asked the salesman who replied that many people do not pay on time and if they do not 0% becomes penal %.

        Now on the Virgin Money website I notice this.

        “Representative example:
        Purchase rate

        18.9% p.a.
        on card purchases”

        I checked the Bank of England website as it publishes an overall credit card rate and here is the latest (for September)

        “The credit card rate (all balances) increased to 10.53%, a 12bps increase on the month ”

        So my assumption is that they are loss leaders for profitable products or if you want it in terms of Freakenomics along the lines of a drug dealers business model.

        • The loss-leader argument does not hold; none of these are new credit cards.
          The offers are all on credit cards we have had for years, but many have never been used other than for their introductory offer and subsequent similar offers, so the banks are well aware of my behaviour, yet still make these offers.

    • @BobJ – yes, but isn’t this a vicious circle? ZIRP triggers an explosion of debt, which causes observers to conclude that IRs can never ever go up again, which triggers an even bigger explosion of debt. Where’s the exit?

      And yes, debt service costs take a bite out of discretionary spending. But so too do soaring housing costs, which again are a direct result of ZIRP-forever.

  2. Hi Therrawbuzzin It’s an interesting point you make.
    I believe banks are fighting for their share of current accounts and are using tactics of higher rates which has done so well for Santander in gaining thousands of these accounts over the last couple of years or so.
    As banks downsize on investment banking or quit it altogether to concentrate on retail banking,added with the advent of challenger banks, things will be very competitive over the next few years.
    This is the reason I think banks have no interest in offering good rates on a cash Isa even if you are prepared to fix for 2-3-5 years,

    • Hi Midge

      As I have been sorting out my late fathers savings for my mums benefit I have noticed that a lot of the gain from being tax free goes if you take out a fixed rate ISA. What I mean by this is that you can get a little over 2% for an ordinary one year bond but only 1.81% for the ISA equivalent. So you lose half the tax saving.

      Of course at current interest-rates many retired savers may not be paying tax as interest-rates are so low. However take care as of course one day they may be more valuable.

  3. Great column, Shaun, as usual.
    Today Justin Trudeau was sworn in as Canada’s Prime Minister. As my friend Ian Lee predicted, newly elected MP Bill Morneau is the new Minister of Finance, while Scott Brison, the Liberal Finance critic in the previous parliament, was made the president of the Treasury Board, one of the other major economic portfolios. A lot of British people may have heard of Chrystia Freeland, who was a stringer for the Economist and the Financial Times when she lived in Ukraine and later was head of the Financial Times Moscow office. She has been a Liberal MP since she won a by-election in Toronto Centre in 2013, now Mr. Morneau’s riding, and is now the International Trade minister.
    The choice of Stéphane Dion, the former Liberal Party of Canada leader as Minister of Foreign Affairs suggests that the Trudeau government will give a high priority to environmental negotiations on the international scene as green policies have always been central for M. Dion. The new Minister of the Environment is the lovely and charming Catherine McKenna, MP for my riding of Ottawa Centre, who upset the Opposition Foreign Affairs critic to win her seat in the October 19 election.

    • Hi Andrew

      Thanks for the update and the reminder about Rush who have got mostly forgotten over here even on the rock stations. Spirit of the Radio was the hit over here and I have it playing right now.

      As to the web scraping issue how regularly do things like that happen in official statistics? I would like to think extremely rarely.

      • Shaun, glad to know that you are a Rush fan, too. They have always had a strong fan base in Canada, since they are a Toronto group. It was great to see them finally get inducted in the Music Hall of Fame two years ago.
        Regarding the ONS chain linking error, I mentioned in a comment on one of your earlier columns the bad error in the CPI for traveller accommodation which substantially underestimated the inflation rate. It was acknowledged but not corrected, as the Canadian CPI estimates are seldom ever revised. Uzbekistan published monthly-linked seasonally weighted consumer price indices for fresh fruit and vegetables that showed way too much inflation. This is described in an IMF paper by Shelley Winston and John Wakeman Lin: “Inflation in Uzbekistan: Official versus Fund Staff Estimates and the Role of Seasonal Goods.” I commented on an earlier version of the paper by Shelley but the IMF was unwilling to provide me with a copy of it. As far as I know Uzbekistan has never acknowledged its error and may even still be using the same method.
        These were different from what I understand happened with the ONS indices. The Canadian chain links were correct at the beginning but got worse as they went along. The Uzbek links were never wrong per se, but were subject to a strong upward drift above the corresponding direct index or anything that was reasonable. However, in neither case did they just invert links so that decreases seemed to be increases. This error would seem to be sui generis. I hope it stays that way.

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