Firstly let me wish you all a happy and successful 2016 as we look forwards to what I expect to be another action packed year on the economic and financial front. I have been thinking about the state of play in the UK and in particular what we can expect from the Bank of England. It begins in leisurely fashion as its Monetary Policy Committee does not meet until the 14th and there is quite a different pattern for 2016 in the dates announced. This is part of warming us up for the number of meetings per year falling from 12 to 8 although even HM Parliament has spotted a flaw in this.
For example, rates were changed in 5 meetings in a row between October 1998 and February 1999, 3 successive meetings between September and November 2001 and 6 successive meetings between October 2008 and March 2009 (see table below). There are a number of examples of rates being changed in 2 successive months.
Although of course this March may see an official interest-rate which has not changed for 7 years. Also you may have a wry smile at the fact that the lazier attitude to the number of meetings is being justified on the grounds of “transparency”. Lexiographers cannot be short of work these days.
This is the “turn of the year”
Back on the 16th of July Bank of England Governor was clear in his hints that interest-rates were about to rise.
I expect that this will involve raising Bank Rate over the next three years from its current all-time low of ½ per cent.
We then via the path of inflation also got a strong hint as to when he expected this to begin.
a firming that will become more apparent as the effects of past commodity price falls drop out of the annual inflation rate around the end of the year.
Which was reinforced by the statement below.
In my 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.
Just to make sure that even those who were on their summer holidays got the message Governor Carney repeated it a week later as City-AM reported.
The Bank of England will need to decide around the turn of the year whether the time is right to start to raise interest rates from their current record low, its Governor Mark Carney said last night.
In October our globetrotting Governor went all the way to Lima in Peru to repeat the same old song as the Financial Times reported.
The governor repeated comments in the summer that the decision over UK rates “comes into sharper relief around the turn of the year”
Those of you wondering about how that effort at Forward Guidance 9.0 went may like to note the complete lack of absence of discussion about a UK Bank Rate rise anytime soon. This is in marked contrast to the US Federal Reserve which sang along to “Back it up Baby” by Nils Lofgren and nudged interest-rate higher in mid-December, as well as suggesting a path involving more rises (4) this year.
What went wrong this time for Governor Carney and his Forward Guidance?
As 2015 headed towards its end we saw a second wind for the oil and commodity price disinflation with which it began. This morning has seen a direct consequence of this for UK inflation developments as Tesco and Asda join Morrisons in reducing the price of a litre of diesel below £1. This compares to £1.18 from the official figures on a year ago. Petrol has not fallen by as much but even it has seen a substantial drop.
Another way of seeing the current state of play is to note that both Brent Crude Oil and West Texas Intermediate are at around US $37 per barrel in spite of the tension between Iran and Saudi Arabia. There was a time not so long ago when the oil price would have shot higher in response to any such sabre rattling.
On the other side of the coin even the institutionalised inflation to which the UK is prone is lower this year. For example commuters will see that this year regulated rail fares have risen by 1%. I am surprised that the BBC is leading so much on this as I thought that the BBC message was that inflation is good for us although perhaps they will let us know why 1% now is more significant than the 5% of a few years ago. But it is good to see a change of heart from them.
Back in July Governor Carney gave us this Forward Guidance on wages.
wage growth is picking up……..Further positive wage developments should be supported by a continued tightening in the labour market.
Up was indeed the new down for Governor Carney as he picked the top of the UK wage cycle as July saw 3.6% growth for total earnings but the latest numbers for October were only 1.9%. Sadly he does not seem to have picked up the credit crunch message that theories of “continued tightening” are a repetition and reformulation of the output gap theory that has completely failed over the past 7 years. In fact hammering that point home has been one of the successes of this blog.
Other MPC members have been emphasising the slow down in wages such as this from Martin Weale in the Daily Telegraph just before Christmas.
If you look at wage growth over the last six months rather than the change over the last year, there has been very little growth.
That is the new mantra although some care is needed with the pronouncements of Martin Weale as he promised an interest-rate rise “relatively soon” as recently as September. Oh and whatever happened to the interest-rate rise “likely in spring 2015”. More like anti Forward Guidance.
Just before Christmas the UK received some unwelcome news from its official statisticians.
UK GDP in volume terms was estimated to have increased by 0.4% between Quarter 2 (Apr to June) 2015 and Quarter 3 (July to Sept) 2015, revised down 0.1 percentage points.
This downbeat message was reinforced by this.
Between Quarter 3 2014 and Quarter 3 2015, GDP in volume terms increased by 2.1%, revised down 0.2 percentage points from the previously published estimate.
Some care is needed here as even a 0.2% change is within the margin of error but for policymakers looking for excuses not to raise interest-rates it is likely to prove convenient. It is also true that GDP trends have proved a solid guide to Bank of England policy moves.
The GDP theme has been picked up by this morning’s survey on UK manufacturing.
The UK manufacturing sector ended 2015 on a disappointing note, with its rate of growth slowing further from October’s recent high back down towards the stagnation mark……. it does also suggest that manufacturing output over 2015 as a whole may be below the level achieved in 2014.
It is my view that a Bank Rate rise in the UK remains in the distance as we note that disinflationary pressure seems set to reach the spring and that the economy may have just seen a softer patch. Slower wage growth can be thrown into the mix too. If we note that Martin Weale was probably the most likely member to join the sole member voting for a rise we see that if not the “So Far Away” of Carole King it is not near. In fact we could just as easily see a vote for further easing of policy.
As for the UK economy it gets ever more dependent on services which as of the last survey were doing well. We find out more on Wednesday but the UK economy still has forwards momentum and should be helped by the Euro area improvement. Indeed the monetary situation remains expansionary with Bank Rate at an “emergency” level of 0.5% and numbers like this released earlier.
Total lending to individuals increased by £5.3 billion in November, compared to the average monthly increase of £4.4 billion over the previous six months…….Lending secured on dwellings increased by £3.9 billion in November, compared to the average monthly increase of £3.1 billion over the previous six months.
If we look at unsecured credit we do see the sort of numbers that might in the past have led to a Bank Rate rise.
The three-month annualised and twelve-month growth rates were 9.3% and 8.3% respectively.
The policies which have driven this were supposed to led to a surge of lending to smaller businesses, how is that going?
Net lending to SMEs was £0.1 billion.
The “all bets are off” disclaimer could come if the UK Pound continues its recent weaker phase. I am a little worried by its prospects for 2016 and should it dip it tends to do so sharply.