Yesterday was rather a significant day for the Bank of England although the so-called “Super Thursday” was in terms of actual action yet another damp squib.
at its meeting on 11 May, the MPC voted unanimously to maintain Bank Rate at 0.5% and to maintain the stock of purchased assets, financed by the issuance of central bank reserves, at £375 billion.
Only in terms of the “masterly inaction” so beloved of Sir Humphrey Appleby was that a Super Thursday. However there was a reminder of why back in Canada there was a campaign as shown below.
Mark Carney for Liberal Leader.
He was criticised for interfering in politics and as the party he would have led surged from third place to win the next election he showed an early sign of his Forward Guidance by instead opting for the Bank of England.
This brings us to yesterday which became – especially in the press conference – a one subject day as the consequences of Brexit ( the UK leaving the European Union) were debated. Those on the remain side will have cheered his claims whilst the leave camp will be disappointed and point out that the claims he does the wishes of George Osborne have another tick in the box. Perhaps this section of the remit is currently applying.
Subject to that, the MPC is also required to support the Government’s economic policy,
As ever let me avoid the politicking but point out that the UK establishment is solidly in one camp and the rhetoric from Martin Sanbu in the Financial Times is bizarre.
But the BoE uniquely combines the authority of a venerable government institution with a well-deserved reputation for independence and competence.
Forward Guidance on interest-rates? The “rebalancing” of Mervyn King? What of course we are seeing is one section of the UK establishment doffing its cap towards another.
Scaremongering from Governor Carney
There was a fair bit of this on display yesterday.
the EU referendum has begun to weigh on activity…… Households could defer consumption and firms delay investment, lowering labour demand and causing unemployment to rise. At the same time, supply growth is likely to be lower over the forecast period, reflecting slower capital accumulation and the need to reallocate resources. …… This combination of influences on demand, supply and the exchange rate could lead to a materially lower path for growth
At one point he went even further. From BBC News.
“could possibly include a technical recession”.
Here has invented his own term as we wonder exactly how this differs from a recession?! Perhaps he thought he would look clever. However in ordinary circumstances the establishment would round on someone saying this accusing them of “negativity” and “talking the economy down”.
If we look back to the policy horizon or when the Bank of England was setting monetary policy for now we go back to May 2014. What was happening then? Well Mark Carney was under fire on the subject of Forward Guidance. He had more to say on the subject that day.
the economy has edged closer to the point at which Bank Rate will need gradually to rise.
I will let him off the way that oil price forecasts and hence domestic energy costs barked up the wrong tree but economic growth or GDP forecasts are material. We were told that annual economic growth would now be 3% and rising or pretty much flat out. One section of the forecast had it edging towards 6%! That does matter because you see where we are is in the equivalent bottom zone to that if we note the update from the NIESR ( National Institute for Economic and Social Research) from Tuesday.
Our monthly estimates of GDP suggest that output grew by 0.3 per cent in the three months ending in April 2016 after growth of 0.4 per cent in the three months ending in March 2016.
The latest business surveys have us dropping out of the fan chart altogether.
The PMI surveys are collectively indicating a near stalling of economic growth, down from 0.4% in the first quarter to just 0.1% in April.
These have been reinforced by this mornings official construction numbers.
In March 2016, output in the construction industry was estimated to have decreased by 3.6% compared with February 2016……….In Quarter 1 (Jan to Mar) 2016, output in the construction industry was estimated to have decreased by 1.1% compared with Quarter 4 (Oct to Dec) 2015.
I have regularly reported on the many troubles in the official UK construction data but they come on the back of poor production and manufacturing numbers. Indeed looked at alone they have fallen into a recession as output has fallen in two quarter for both.
So both Forward Guidance for an interest-rate rise and forecasting have been their usual failures. Thus Governor Carney was probably relieved to use a possible Brexit as a scapegoat as after all the weather has been pleasant recently and the winter was mild.
There will be more than a few minds on the Monetary Policy Committee mulling this statement.
In the United Kingdom, activity growth slowed in Q1 and a further deceleration is expected in Q2
After all the “output gap” they tell us so much about has just got wider. Let me just be clear that the output gap has failed as a predictive tool but the official reply to this is to sing along with Shania Twain.
That don’t impress me much
Oh and if the surveys and data shown above are any guide then this was guilty of understatement.
Growth over the forecast horizon is expected to be slightly weaker than in the February projection.
Reading those excerpts you may be surprised by this conclusion.
the MPC judges that it is more likely than not that Bank Rate will need to be higher by the end of the forecast period than at present to ensure inflation returns to the target in a sustainable manner.
Please do not misunderstand me that are valid grounds in terms of inflation targeting for such thoughts but this is a body which ignored consumer inflation rising about 5% per annum in the autumn of 2011 and it is now less than one tenth of that. Whereas government economic policy needs some “supporting” right now.
Governor Carney must be pleased that he has been able to open the door to an easing of UK monetary policy and a possible Bank Rate cut with so little response. After all it would be a catastrophic failure for his policy of Forward Guidance should Mark 19 be completely the opposite of its predecessors. Thus he must have been delighted to be able to travel in a smokescreen provided by the heat and light ( admittedly very little light) of the Brexit debate.
In an ordinary meeting he would have had to face even more questions about his own competence and abilities as well as his period of tenure as Governor. Oh and you know my view on official denials and forecasts…
IMF’s Lagarde: UK Interest Rates Could Rise Sharply If UK Leaves EU (@livesquawk)
You might have thought our valiant anti-corruption crusader might have been quiet as reminders circulate of her own corruption trial! But I guess she too is grateful for the distraction provided. As to her role as an economic seer well you merely need to look up both her and the IMF’s record on Greece. Her fellow travellers at the Financial Times may have to forget what they wrote in 2014 though.
IMF getting it wrong again and again
Meanwhile I note this rather extraordinary statement from Andy Haldane the Bank of England’s Chief Economist in a speech in Edinburgh yesterday.
Each comprises internal and external members, individually accountable and drawn from diverse backgrounds.
That is the MPC,FPC and others. Really? Anyway they diversely voted 9-0 again.