It is a long and winding road to a UK interest-rate rise

Today sees the UK production numbers released and they will be poured over on two counts. Firstly they have shown signs of weakness and more recently decline. A fall of 0.4% for production in December reduced the annual rate of growth to a mere 1% whilst manufacturing fell by 1.7% on a year before. This was quite a setback to the claimed “march of the makers” and indeed the “rebalancing” of former Bank of England Governor Mervyn King. Instead we continue the shift towards the service sector which will only be exacerbated by the outright decline in manufacturing.

Also if the business surveys are any guide then January was a good month for manufacturing as shown below.

UK Manufacturing PMI at three-month high of 52.9 in January……Moreover, the rate of expansion in output accelerated to a 19-month high.

Now the picture on the Purchasing Managers Indices has changed as we now see 49-51 as stability but there was some growth recorded and it was backed up by the second statement. This is made more significant by the fact that if February was any guide this was as good as it gets.

February saw the rate of expansion in the UK manufacturing sector slow back towards the stagnation mark. Output growth eased sharply………..The slowdown was also reflected in the labour market, with job losses registered for the second straight month.

The reading of 50.8 is back in the stagnation zone and this time around also had a worrying tinge for the UK economy as it was accompanied by reports of slowing growth in both the construction and services sectors.

The Bank of England

I have pointed out that there has been something of a bipolar response to recent economic news by the Bank of England and this was perfectly illustrated by the speech given by the hapless Martin Weale yesterday evening.

As we said in our most recent set of minutes, we collectively believe it more likely than not that the next move in rates will be up. I certainly consider this to be the most likely direction for policy.

So likely in fact that he has stopped voting for it! That makes it two seperate sequences now where Dr.Weale has searched for the interest-rate increase button and then retreated after giving-up. Awkward to say the least. Anyway Dr. Weale wanted to talk about the Doppelganger of interest-rate rises which is policy easing.

However, I want to discuss unconventional policy options today because the Committee does not want to be a monetary equivalent of King Æthelred the Unready

Like in 2007/08 Martin? And many will be wondering “Unready” for what? With the Bank of England’s appalling forecasting record calling something “unlikely” means that it in fact has quite a good chance of actually happening.

What does Dr.Weale suggest?

He is quite a fan of Quantitative Easing as shown below.

I do now think that the policy was highly effective, and indeed that it may have contributed more than previously thought to the rate of inflation in 2010-2012.

Ah the same burst of inflation that so depressed real wages back then as both CPI ( Consumer Price Index) and RPI (Retail Price Index) peaked at annual rates of over 5%? Odd to claim success via reducing real wages and it is something for the “desperate business” cartoons of Private Eye. This attempt to blow his own trumpet has produced a dirge for the UK economy rather than the hoped for celebration.

Still Dr. Weale threatens more of it may come.

Furthermore, it seems to me that the second and third rounds of asset purchases were as effective as the first round. That is not to say that any new purchases would remain as stimulative to the economy, but it does give grounds for optimism.

So stimulative in fact the Bank of England had to introduce the Funding for Lending Scheme to kick the housing market into action! Also Martin seems untroubled by this feature.

Theoretical analysis has had some difficulty in identifying the channels through which asset purchases work……. the Bank of Japan has been doing so since 2001.

Since 2001 but apparently still not working!

Negative Interest-Rates

We do get something of a warm-up on this subject.

At home, banks’ balance sheets have improved since the early part of this decade and we now take the view that there is room to reduce Bank Rate below ½ per cent should that become appropriate.

Of course the sequence of bad banking results released in 2016 provide a disturbing back drop to the hype here but Dr.Weale is plainly preparing us whilst hurriedly skipping by the issue of if now why not back then?

Forward Guidance

There are obvious problems here as we advance of UK Forward Guidance Mark 15.

In these circumstances, it turns out that a commitment to keep interest rates low in the future has a powerful immediate effect on both output and inflation

Really? Even in the world of Dr.Weale there is a problem.

Of course, one reason why the promise might not be effective is that it would not be believed.

Well that might be because there is confusion here as to whether they were promising to keep interest-rates lower for longer or as it quickly changed to promises of an increase. Of course the former was true although there were credibility casualties on the way.

In fact, as you know, unemployment has fallen well below our threshold of seven per cent

I thought 7% was not a threshold? Mark that bit for the next time we are told it was not one.

Helicopter Money

Dr.Weale does not call it this I guess because if your natural environment is high up in an Ivory Tower who needs a helicopter? You just open the window and shower people with notes. Just as a tip for him and the many other Ivory Tower proponents of Helicopter Money no coins please as they may hurt someone falling from that height. Still look who pops up.

Turner is very aware of this problem and he suggests that, to make the policy work, bank reserves, or at least the major part of them, should not receive interest.

Ah Adair Turner who has proposed every form of monetary easing under the sun in recent times. You may note we are being warned about lower not higher interest-rates under the plan from the man who was gloriously described in the comments section on here as having a “talentless ascent”.

Today’s data

The good news is that January did see the predicted uptick in manufacturing with the monthly comparison doing this.

manufacturing (the largest component of production), having the largest positive contribution, increasing by 0.7%.

However the annual comparison whilst better still tells its own story.

Manufacturing output is estimated to have decreased by 0.1% in January 2016 compared with January 2015. Output decreased in 7 of the 13 manufacturing sub-sectors compared with a year ago.

If we move to the wider production numbers we see this.

Total production is estimated to have increased by 0.3% between December 2015 and January 2016…….Total production output is estimated to have increased by 0.2% in January 2016 compared with the same month a year ago. The only main sector to rise was water supply, sewerage & waste management, which increased by 9.3%.

As you can see the annual comparison is disappointing and not far off the “sewerage” mentioned as we continue to shift the emphasis of our economy towards the service sector.

There is an awkward element as North Sea Oil and Gas output contracted as it has ebbed and flowed recently as past maintenance periods have boosted the annual comparisons. Still one thing remains consistent.

Anecdotal evidence suggested that stormy weather was a contributing factor to the decrease in output observed in the oil and gas production facilities in the North Sea.


It is good news that the production figures improved somewhat in January because the surveys for February are not good. Meanwhile the Bank of England continues to mark our card about monetary policy easing and interest-rate cuts whilst its Forward Guidance promises an interest-rate rise. Should the economy slow further how long will they wait?

Meanwhile we find out some more about Zero Hours Contracts.

The latest estimate of the number of people who are employed on “zero-hours contracts” in their main employment, from the LFS, a survey of individuals in households, is 801,000 for October to December 2015,

Up by 104,000 on a year before but another measure shrank.

there were around 1.7 million contracts that did not guarantee a minimum number of hours, measured with regard to work carried out during the fortnight beginning 9 November 2015. For the May 2015 reference period (the fortnight beginning 11 May), the equivalent estimate was 2.1 million.

It seems that getting to the bottom of that is a long and winding road to say the least. RIP George Martin and thanks for all the music.



19 thoughts on “It is a long and winding road to a UK interest-rate rise

  1. Hi Shaun

    They really are at sixes and sevens aren’t they?

    I’m sure that Martin Weale knows full well that, in the context of a two year policy horizon and on the basis of the oil price time profile and the recent fall in sterling ( buttressed by Carney’s comments about turbulence on Brexit) you would have to conclude that there is a significant possibility, if not probability, that inflation will exceed 2% within the next two years. Therefore interest rate rises should be actively being considered.

    That they are not, together with almost everything else that comes out of the BOE, clearly shows how boxed in they are. To me there is a hint in what Martin Weale says about QE; he might suggest that we had at least some interest rate rises to keep to the policy mandate and yet restart QE in the background which would, effectively, offset it.

    At the end of the day they know full well that we have too much debt and cannot stand an interest rate rise; it’s all trying to dance on the end of a pin; it won’t work.

    • Good stuff Bob.

      ‘At the end of the day they know full well that we have too much debt and cannot stand an interest rate rise; it’s all trying to dance on the end of a pin; it won’t work.’

      The UK is between a rock and a hard place.I think we need a rate rise to stimulate growth.I really do.It may seem mad,but cutting rates has destroyed the velocity of money.Said fall in VoM has merely offset the increase in money supply.

      Shaun mentioned real wages and that’s the key.When you look at working age households they’ve suffered while retirees have enjoyed index linked rises in income.

      To my mind they’re looking at a rate rise for all the wrong reasons.There’s no sign of demand pull inflation in anything but housing(and that’s linked to a bloated banking sector leveraged to the eye balls).

      We’re just trundling blindly toward a currency crisis.And all these people think the solution to our problems is to create 2% inflation.

      If only it were that simple.

        • Bob, we’ve been here before. There are plenty of investment opportunities in medicines, new treatments and mechanical replacements for body parts when faced with an ageing demographic. The expenditure is moving from consumption to investment in the medical field in R & D, existing medical equipment, pharmaceutical and IT companies.

          Many treatments are not available on the NHS so those who can afford it will pay, thereby diverting their expenditure from consumption to medical expenditure.

          Their income, once Occupational pension combined with State Retirement Pension has been taken into account with the absence of any NI deductions is very similar to their full time take home pay unless they were highly paid individuals, but in economics we should be concerned with the majority and aggregates which means there will be no less demand until we are faced with a falling population (even then there could be bizarre developments that actually boost demand but that is for another post) and the wealthy may decide to start giving away their wealth to their relations prior to death to thwart the tax man thereby helping consumption in the lower age groups.

        • I forgot to say, I agree wholeheartedly with Dutch on this, the VOM has fallen due to collapsing interest rates as savers save all the harder out of their earned income as they see they can’t achieve inflation protection via deposit savings, nothing to do with demographics. The investment target has moved. VOM will increase if rates go up around 1% in the UK even considering the indebted population.

  2. Other than pedantry, may I ask what the difference is between a zero-hours contract and one with no guaranteed minimum hours?

      • If only I’d read all the comments I wouldn’t have reused this quote in my reply to Bob.

        But I agree entirely with your assessment JRH.

    • Hi therrawbuzzin

      You may regret asking this but here is the view of the Office for National Statistics.

      What are “zero-hours contracts”?
      There is no single agreed definition of what “zero-hours contracts” are. While some contracts are explicitly called zero-hours contracts, there are other definitions available and used in published statistics. The common element to the definitions is the lack of a guaranteed minimum number of hours.

      When developing the survey of businesses, we consulted on the definition to be used and decided on the lack of any guaranteed hours. To provide clarity and prevent confusion with the other estimates of “zero-hours contracts” the rest of this article refers to estimates from the ONS business survey as no guaranteed hours contracts.

      When comparing figures from the ONS business survey with the LFS estimates, a number of issues need to be considered:

      the LFS counts people who report that their main employment is a “zero-hours contract”
      the estimate from businesses is counting contracts, which will be greater than the number of people as people can have more than one contract
      estimates from businesses will include contracts that cover a variety of working arrangements, which will include instances where people in their main employment are working a regular number of hours a week (although these hours are not guaranteed by their contract) as well those who work on an irregular basis due to personal choice, availability of work or to fit in around their main employment

  3. It looks like Mr Weale shares a vulgar, perhaps now near-universal, misconception – ignorance one might accurately say – concerning Aethelred the Unredy (not Unready). The Anglo-Saxon epithet meant and means something like ill-advised, ill-counselled, unwise. Draw what conclusions you will about Weale from this, there’s certainly unwitting irony here. Perhaps he also thinks that Canute visited the shore in the belief that he could order the tide back. Possibly he thinks that big shot jacks-in-office can indeed command tides.

    • Hi James

      I like that as not only do I like history to be as accurate as possible but “ill-advised, ill-counselled, unwise.” seems to cover Dr.Weale pretty well. I note that the National Statistician has published support today for CPIH which I remember debating with Dr.Weale at the Royal Statistical Society. So they press ahead with something which nobody but them believes in, sound familiar?

      “There is some disagreement among users about the concepts and methods that ONS uses to measure Owner Occupiers’ Housing costs within the CPIH. ONS needs to do more to explain and articulate its own judgements about the concepts and methods that it uses, and could engage more positively and openly with a wide range of users, including interested users that have a range of opinions not necessarily in accord with ONS’s own views.” UK Statistics Authority.

  4. Hi Shaun
    There is a strong rumour that the real reason the BoE have not reduced their rate below 0.5% is because they were warned that their own and several commercial banks IT systems can’t cope with a zero or negative rate. A bit like the ‘millenium bug’ issue. Perhaps they feel like a patch is now working so its now time ‘to go to hell in a handbasket’. Of course Jane might have a whisper in Mark’s shell-like.

    • Hi JW

      More than a strong rumour as I remember it back at the time as there was fear over what the Cheltenham mortgage which was either 0.52% or 0.54% below Bank Rate would do to its database and that of Lloyds Bank as it dipped below 0%! If I recall correctly the work around was to reduce the capital more quickly rather than blow up the interest calculation system. So a bit like the Year 2k issue you mention it came to nothing…

      However other consequences such as people paying taxes early or wanting tax repayments on negative interest well they have happened elsewhere….

  5. ‘He is quite a fan of Quantitative Easing as shown below.

    ‘ I do now think that the policy was highly effective, and indeed that it may have contributed more than previously thought to the rate of inflation in 2010-2012.

    Odd to claim success via reducing real wages ‘

    Super comment there Shaun,sums it up perfectly.They created a massive asset bubble and now he wants out thanks.Unbelievable.

    ‘Still Dr. Weale threatens more of it may come.

    Furthermore, it seems to me that the second and third rounds of asset purchases were as effective as the first round. That is not to say that any new purchases would remain as stimulative to the economy, but it does give grounds for optimism.’

    The layman’s definition of insanity is doing the same thing a second time and expecting a different result.Almost surreal.

    • Hi Dutch

      As it is Champions league night let me use a football chant used not that long ago not far from me to describe someone in charge.

      ” You don’t know what you’re doing! You don’t know what you’re doing!”

      Meanwhile the driver presses harder on the accelerator…

  6. I always enjoy your blog shaun. I’ve noticed with amusement your steadily increasing degree of sarcasm (fully justified) towards the establishment clowns in charge of managing the economy as they resort to ever more extreme policies and ludicrous spin. Unfortunately the vast majority of people have no interest in understanding and analysing monetary policies so Dr Weasel, Mark Carnage et al can continue to spout contradictory nonsense without any danger of being ridiculed by the masses. Just today i had someone at work tell me how everything’s fine because he had read that government debt had halved since the financial crisis – it took several minutes to explain how he’d confused debt with deficit and the former had doubled. I suspect the BOE are deliberately having different people argue how they expect interest rates to go up, down or stay the same so they can later point to the narrative which turns out to be true thereby showing how prescient they are.

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