How far away is a Bank of England interest-rate rise?

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?

Oil Prices

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.

Wages

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.

Economic Growth

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.

Today

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.

Comment

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.

 

 

 

Advertisements

21 thoughts on “How far away is a Bank of England interest-rate rise?

  1. Hi Shaun

    Happy New Year!

    I’m sure your analysis is right; I don’t see IRs increasing anytime soon.

    As you record we are notching up ever more debt, both public and private, at a far higher rate than GDP growth which takes us farther away from being able to afford an interest rate increase rather than the converse.

    Frankly I don’t think the BOE want to increase IRs because they are fully aware that the economy can’t stand it.

    I also think your caveat is right re the exchange rate. I think the BOE will only increase rates if the exchange rate falls substantially; because they have little choice in that case. With the potential implosion of the Chinese economy one does wonder if all those capital account inward flows to buy up those Battersea flats will dry up and there will be a sudden drop in the £ as a result.

    I also wonder how long it will be before people start realizing the effect of ZIRP on pension and insurance funds.

    I suspect that 2016 will be a bumpy ride.

    • Happy New Year to you Shaun and all your readers!
      I agree, with you Bob J, except that so far the BOE have been inept at all they have done, so why not put up interest when they don’t have to, just to follow the US and to show they are dynamic?

    • Super post Bob,you nail a few of the issues I was going to mention.
      1)Growth is coming at the expense of a booming private debt/GDP ratio.
      2)IR’s will only move up to defend sterling.I agree.The BoE has the wrong solution for the wrong problem.
      3)ZIRP has totally distorted income/spending patterns across demogrpahic groups,not least resulting directly in a downward spiral in money velocity.The BoE’s solution to their own misdeeds is to keep rates lower for longer when the solution to raising velocity is rasing rates.

  2. It’s wonderful to have your column, back Shaun. Regarding the move from 12 to eight meetings of the MPC, as you know, the Bank of Canada has had a schedule of eight meetings for overnight rate announcements for some time. Just because the Bank of England cut the bank rate every month over the six months from October 2008 to March 2009, I am not sure that monthly meetings are required, even in emergencies. The Bank of Canada didn’t depart from its scheduled meetings during the global financial crisis. It cut the overnight rate from 3.0% to 2.5% in October 2008, then going to 1.5% in December, 1.0% in January 2009, 0.5% in March and finally 0.25% in April, i.e. at every meeting from October 2008 through April 2009. If it had scheduled monthly meetings it might have cut to 2.0% or something else in November or to 0.75% or something else in February, but would it have made any difference? All the economic actors seemed to be aware that interest rates had taken the down escalator and incorporated it into their decision-making.
    I find even with the eight announcement dates for the Bank of Canada it gets boring hearing them always bang away on the same points. I wouldn’t like to hear them repeat themselves more than they already do, as they certainly would do if there were a monthly schedule of interest rate announcements.

    • ‘I find even with the eight announcement dates for the Bank of Canada it gets boring hearing them always bang away on the same points.’

      When you look at it from that perspective,I find myself agreeing with you Andrew.Less meetings will lower the risk of my boot going through my TV.Mrs Dutch will be relieved.

  3. A Happy New Year Shaun. One sad start though – I heard of the death of Edward Hugh, the British economist who lived in a village just north of Barcelona and who had a blog devoted to the Eurozone. I have had many interesting and pleasant exchanges with Edward over the years and his expertise will be sorely missed. a nice man with a sharp brain.

    There are some potentially significant events that could alter what the bank does. Brexit, an economic war between Saudi and Irin that would drop the price of oil and hence inflation still further, a hot war between them that would have exactly the opposite effect. I do wish that rates were a little higher though if only to provide ammunition for the next unforeseen event.

    • Hi Pavlaki

      Thank you for the reminder about Edward Hugh who I also had some friendly exchanges with. I was concerned about the way he “dropped off the radar” in the summer and when I discovered recently that it was cancer followed by kidney problems I hoped for the best but feared the worst. In the modern manner I sent out my condolences on Twitter but you are right it should also be on here. RIP. For those unaware of his work much of it was based around (declining) demographics.

      As to your interest-rate wish Stanley Fischer of the US Federal Reserve has been having similar thoughts although he expressed them differently.

      “Negative Interest Rates: Another possible step would be to reduce short-term interest rates below zero if needed to provide additional accommodation….. It is unclear how low policy rates can go before cash holdings rise or other problems intensify, but the European experience has certainly shown that zero is not the effective lower bound in those countries.”

  4. First of all Shaun,my own best wishes for the New Year and great to see you back blogging.

    Pavlaki alludes to a key issue here and that is that we’re boxing ourselves into a corner here.We’re reliant on the continued low IR’s and the expansion of private and public debt for our growth.Siad GDP growth is the basis for our ability to repay said debt.

    All it will take is a currency crisis caused by either Brexit,IR’s moving up internationally or a realisation that we’re on an unsustainable debt growth path and sterling will be toast.Due to the fact we’ve had emergency IR’s for 7 years +,our room for manouvre will be limited to more QE-not worked thus far,more IR cuts-not worked thus far or increased govt expenditure-all that’s done is increase the national debt.

    My question is this.Are there any options in the BoE playbook that I’ve missed.The Fed has clearly seen the pension crisis as potentially greater than the debt crisis they helped create and moved.The BoE still seems to be fiddling at the edges and missing the major issues.

    I note of course that house prices were up in Dec.Phew.We’re saved.

    • Hi Dutch

      There are various issues present right now which have caused trouble for the UK in the past.

      1. House price boom and lending not matched by business lending
      2. Public Finances disappointing
      3. Persistent Balance of Payments deficit
      4. Unsecured lending motoring.

      As to options the Bank of England could stop making things worse via withdrawing over time the FLS mortgage lending and as I have been suggesting for a couple of years stopping Operation Twist for QE. However it would the a confession that they have boosted things via elements of a junkie culture.

  5. Hello Shaun

    Who will make the BoE blink first ? the Pension companies or the TBTF Banks?

    The Pension companies must be pretty hacked off at the pension changes – the potential loss of capital to the Banks via housing must be vexing !

    Lets hope this year is good, but sorry, lhe few months have been indicating a downwards tick

    and now we have a small black swan from KSA

    Interesting times !

    Forbin

    PS: one of the latest reports show that Shale Oil or LTO is economical over $70 . Seems we may have another crisis with bust oil Co.s that “nobody could have forseen” !!

    • That KSA/Iran situation could really deteriorate quite quickly.

      Add to that the Chinese govt closing the stock market because…well…because that’s got a long proud history of stopping sell offs..

      In other news,diesel below £1 a litre

  6. Hi Shaun and a happy new year to you and your mother. I hope being away helped both of you to get through this first Christmas since your sad loss.

    I know3 the BOE should have already raised rates and expect a slight acceleration in UK GDP this year without a raise so I have no idea when/if they will raise as they are working off sentiment rather than objectivity and fundamentals. Meanwhile I worry about the Fed’s move as I see quite a slow down in US growth this year without any rate rises. I hope they don’t have to back track.

    • Hi Noo2 and thank you for your kind words. Mum told me yesterday that she had gained half a stone whilst away and that was nice to hear and see as she still has some ground to regain and recover.

      The BoE issue is that they have several reasons to raise interest-rates but are ignoring all of them. I have just given some to Dutch in a reply but there is also the fact that this boom is getting mature now and so time is running out.

      As to the US in addition to the negative interest-rate comments I quoted above there was this from Stanley Fischer.

      “Eliminating the ZLB Associated with Physical Currency: While the European experience suggests that interest rates can be pushed somewhat below zero, the existence of physical currency likely still limits how deeply interest rates can be pushed into negative territory. That observation has led some to ask whether it would it be possible for the financial system to operate effectively without physical currency provided by the central bank. ”

      I get the feeling that he has not travelled as far on this road as Andy Haldane but is now starting to thing about what might happen next………

  7. Hi Shaun, Welcome back and Happy New Year.

    It looks like the “emergency” has become rather permanent. We are in a post-credit crunch phase of slow moving numbers – growth, inflation, wage rises. Only asset prices have any legs.
    I suspect things will only change when the £ falls off a cliff.

    I agree with others who think the BoE/MPC have painted themselves into a corner – the corner of a dark room furthest away from the door handle!

    • Hi Eric and thank you.

      Yes and they are facing the wall wearing sunglasses perhaps even Zaphod Beeblebrox style ones. Ironically it was not the best of days for equity asset prices but the UK drumbeat for house prices continues. Should we see trouble for the UK Pound £ then it poses all sorts of problems just like it always has….

    • That painting has been, to a large extent, deliberate, imv.
      It’s difficult to justify busting the economy just for the financial institutions which caused the mess, but give everyone a very real interest (sic) in ZIRP and…?

  8. Shaun, Great to see you back in 2016.

    Interest Rates, not going up ever if the BoE can help it I think , just like all your other commenters. Only when forced through other factors outside their control will it rise. I think 2016 could be the most interesting year for the maturing of the consequences of QE and central bank put. You will notice that absolutely no one claims to be able to fix the rout in commodities, and we may see the vary same immovable trends in other economic fundamentals. If anything given human factors I suggest that once a fall in currency or property commences then no one will have the power to stop it, I note that old cars seem to be now ridiculously over-priced and I remember that from before, 1989 I think it was.

    Just come back from Christmas in China, and business-men are genuinely stressed by deflation and competition that uses over-valuation to operate on nil-margins.

    Regards Paul C

  9. I think that something I first said about 18 months to 2 years ago, has now become pretty obvious: that the BoE and the Treasury have used interest rate policy to inveigle the public and the wider economy in the desperate need of financial institutions to have interest rates so low that as few as possible of the loans they have made, fail, and forbearance can be used to delay some of even them.

    As for the MPC meeting 8 times a year when action has been needed monthly, I would make two points:
    1) There is no contradiction, Carney would happily see the MPC meet monthly, but the first of this year’s meetings tabled for May, so that even the fools who see him as having some vestigial threads of credibility have their disabusal delayed.

    2) It is absolutely certain, that it is the case, that Carney does not want to take action in successive years, and will do so only if forces compel.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s