Today is Super Thursday in the UK where the Bank of England not only makes its policy announcement and releases the meeting minutes but also we get the Quarterly Inflation Report. The latter may well go some way to justifying the “Super” moniker as the continuation of 7 years of an emergency Bank Rate of 0.5% plainly does not! There will be changes to the Inflation Report as the Bank of England shuffles its feet looks embarrassed and announces its economic forecasts in the manner of Phil Collins.
Or did I miss again
I think I missed again oh
Or did I miss again
I think I missed again oh
If we go back to the Inflation Report of 2015 there was this from Governor Mark Carney.
That a gently rising path of Bank Rate delivers inflation to the target reflects the underlying dynamics of the economy.
Er what rising path of Bank Rate Mark? Those who followed his Forward Guidance and remortgaged are likely to want to use much sterner language. Why? Well look at this quote from Twitter yesterday.
@GabrielSterne Markets pricing in a 25% prob that next UK rate change is down.
Up is indeed the new down for interest-rates may rise “sooner than markets expect” (June 2014) and “around the turn of the year” (September 2015) anti-seer Mark Carney. Does it bother him?
Absolutely not. I have No regrets.
If we return to the subject of inflation then it was forecast to be accelerating upwards right now on its way to the 2% per annum target by the summer as opposed to being zero. The continuing falls in oil and commodity prices have torpedoed such a forecast and this does matter because monetary policy is set a fair way ahead.
It takes time for monetary policy to affect the economy – its peak effect is generally estimated between 18 and 24 months
This is a big issue that those who advocate very activist monetary policy close their eyes too as by the time it impacts it is as likely to be heading in the wrong direction as the right one.
This was illustrated at the last Inflation Report press conference by Ed Conway of Sky News.
Governor, five years ago in the Inflation Report, markets were expecting rates to be about 3.75% now. About a year ago the Inflation Report was – looking at market forecasts – saying that the rate was going to be about 1% now, little bit below 1%. All the time the markets have been forecasting that rates are going to be going up at some point about a year hence or a little bit more. Do you – are you really sure this time around that it’s even worth endorsing those forecasts, given how many times they’ve been wrong in the past?
Ah 3.75% to 1% and now the grim reality that it remains at an emergency 0.5%. Could it have been more wrong? Still if I may be permitted to blow my own trumpet readers here have been much better prepared. From December 2013.
So should we see any slowing of the UK economy in 2014 and the exchange rate of the pound continues to be strong there are factors pointing towards a base rate cut.
As I pointed out earlier markets have come round to that way of thinking that rises are a mirage so what about a cut?
The International Environment
This has changed considerably too as events have unfolded. If we look to the Far East it was only on Friday that we saw the Bank of Japan overcome its aversion to negative interest-rates. Except in a familiar theme of the times the half-life of such moves is getting ever shorter. If you think that this was a move in the Currency Wars then the Yen has regained all its losses and is at 117.6 versus the US Dollar as I type this. The response is yet more rhetoric and Open Mouth Operations.
@fxmacro Kuroda Ally Says BOJ Has No Rate Limit, May Cut to Negative 1%
If we switch to Europe the Euro has rallied to 1.116 versus the US Dollar when Mario Draghi and the European Central Bank are spending 60 billion Euro’s a month on QE to drive it lower. Using the Draghi Rule the rise in the Euro in 2016 so far is equivalent to a 0.5% increase in interest-rates. This leads to speculation as shown below.
@fwred My concern right now: with this kind of market reaction to Draghi, and Buba’s QE hate, the ECB might favour a larger rate cut.
Just to be clear that is for a larger cut than to the -0.5% now expected.
What about the United States and the promised 3-5 interest-rate rises in 2016? Sober Look takes up the story for us.
Thus we see that 3-5 seems to have morphed into a big fat zero as we discover a numerical addition to my financial lexicon for these times.
In short the international environment has shifted away from interest-rate rises in the United States and towards more interest-rate cuts in the Euro area and Japan. Or as Tom Petty so eloquently put it.
And I’m free, free fallin’
Yeah I’m free, free fallin’
Free fallin’, now I’m free fallin’, now I’m
Free fallin’, now I’m free fallin’,
The UK Pound £
It has already been a year of two halves for the UK Pound £. I wrote and the beginning of the year that I expected a drop and as it swept lower from US $1.48 to US $1.42 it backed that up. But the last couple of days or so it has regained strength -although much of this is US Dollar weakness as prospects there change- and is now above US $1.46. I guess a lot of people got short at US $1.42. Putting it another way the rally over the past few days is equivalent to a 0.25% increase in Bank Rate but since the last Inflation Report more like a 1% cut!
UK Gilt or bond yields are also not what you might expect from a country where an interest-rate rise is continually promised. The ten-year Gilt yield is a mere 1.58% and in a subject I will return to in a minute the five-year yield has fallen to 0.9%.
The five-year Gilt yield rose to over 2.1% after Mark Carney hinted at higher UK interest-rates in the summer of 2014 and to 1.4% in late autumn last year. As this is something of a benchmark for fixed-rate mortgages we can see that he has given people exactly the wrong advice!
Putting that into numbers the Bank of England calculated the new mortgage rate back in June 2014 as 3.15% and it is now.
the new secured loan rate was unchanged at 2.55%.
So 0.6% lower not higher as Forward Guidance is laid bare and down is the new up. I doubt there will be a protest group of those who remortgaged on his advice today at the Bank of England but maybe there should be.
The mainstream media honeymoon for Mark Carney is definitely over with even the BBC producing this today.
The governor of the Bank of England has been “too aggressive” in suggesting interest rates may rise
It is a shame they are using a fund manager with an obvious vested interest and moral hazard problem as an authority but perhaps we should not be too churlish. However what does this mean for monetary policy? In reality less than you might think as it has been my opinion for a while that on any economic dip the Bank of England would ease again. What has changed is the international environment where other central banks are engaging in a race to the bottom on interest-rates which is like the Supermassive Black Hole that Muse sung about.
Meanwhile if you look there are signs of both institutionalised and general inflation in today’s news alone if you bother to look.
Energy industry regulator Ofgem is to examine a claim that charity Age UK has been promoting unfavourable gas and electricity deals in return for cash.
The charity sector in the UK is having a dreadful run which is sad news but does offer the opportunity for reform and improvement. Meanwhile in a house near you…
Halifax: House prices increased by 1.7% between December and January……Prices in the three months to January were 9.7% higher than in the same three months a year earlier.
Or for Londoners from City-AM
House prices have broached the £500,000 barrier across 51 per cent of London postcode districts, new research has found – backing up evidence the capital’s homes are becoming increasingly unaffordable.
The report, by estate agent Stirling Ackroyd, found even areas such as Peckham, which were traditionally seen as pretty affordable, have now joined the half-a-million club, with average house prices of £503,000.
Meanwhile away from the spotlight there has been another £4.2 billion of Operation Twist style QE this week.