Take is a rare day in that it is one where we have a live Bank of England policy meeting where there is a good chance that the announcement will not be unchanged! I am being careful with my words because the nine members of the Monetary Policy Committee voted yesterday. So market players will this morning face the issue of potentially trading with people who have an early wire on the news. Should there be a Bank Rate cut then it will be the first since March 2009 and the last vote for more Quantitative Easing was in early 2013 when the previous Governor of the Bank of England Baron King failed to get enough for a majority. That was for the best as he would have eased policy into a boom.
Mark Carney presses for a cut
A few days after the Brexit referendum Bank of England Governor Mark Carney told us this.
we will not hesitate to take any additional measures required to meet our responsibilities as the United Kingdom moves forward.
Considering his pre referendum warnings about the impact of a vote to leave the European Union this provided food for thought which he then backed up with this.
It now seems plausible that uncertainty could remain elevated for some time, with a more persistent drag on activity than we had previously projected. Moreover, its effects will be reinforced by tighter financial conditions and possible negative spill-overs to growth in the UK’s major trading partners.
He then committed himself.
In my view, and I am not pre-judging the views of the other independent MPC members, the economic outlook has deteriorated and some monetary policy easing will likely be required over the summer.
The bit about not pre judging the views of the other 8 members sadly badly with this bit.
As required by our remit, the MPC identified that the most significant risks to its forecast concerned the referendum. This was the view of all nine independent members of the MPC.
If I was one of the 8 other members of the MPC I would have been very unhappy with this.
There are various shadow MPCs around and the City AM version has voted for a cut. Mind you some care is required with these bodies. You might like to check who is on them and the record of the longest established one from the Institute of Economic Affairs has not been great. They told us this less than a month ago.
In its June 2016 e-mail poll, the Shadow Monetary Policy Committee (SMPC) elected, by a vote of five to four, to raise rates in June.
This does mean that they are not a guide to what will happen next I think! Although they have much more of a chance with their suggestion of a hold today of course.
The unreliable boyfriend
This phrase was used about Mark Carney by the Labour MP Pat McFadden just over two years ago. From the BBC.
“We’ve had a lot of different signals,” he said. “I mean it strikes me that the Bank’s behaving a bit like a sort of unreliable boyfriend.
“One day hot, one day cold, and the people on the other side of the message are left not really knowing where they stand.”
Lest we forget Mark Carney had used a 7% unemployment rate as a threshold for interest-rate rises and had just hinted at an interest-rate rise “sooner than markets expect” in his Mansion House speech. What Mr McFadden did not know then was that there would be more policy swerves and U-Turns and that rather than a series of interest-rate increases raising Bank Rate to between 2.5% and 3% there would in fact be none at all.
There is a begged question of here whether Mark Carney will also be an unreliable boyfriend on the issue of interest-rate cuts?
The case against a cut
There has already been quite an easing in monetary policy. If we look at the fall in the effective or trade-weighted exchange-rate since the Brexit referendum is if we use the Bank of England rule of thumb equivalent to a 2% cut in Bank Rate. The situation over the past year is similar to that (slightly more ). If we look back we are near to the recent low established in March 2013 on this measure but returning to the monetary consequences we will receive a boost to both output and inflation from this if we stay here. The catch of course is the mixture which a Bank Rate cut could easily make worse rather than better.
There is also the issue of the fall in Gilt yields ( UK sovereign bonds). The night before the Brexit referendum the 10 year Gilt yield closed at 1.37% and it is at .0.77% as I type this. We have seen a response to this in the falls in fixed-rate mortgages sometime to record low levels. Also if we look longer-term there has been an enormous change in what it costs to borrow with our 30 year yield being 1.61% as I type this. The underlying principle of what I wrote below remains.
This does move us towards the arena of fiscal policy and combines with the issue of the UK having a new Chancellor and government. The “mood music” such as we have it points towards an easing of fiscal policy but we have little or no idea of how much or when beyond hints towards the Autumn Statement in November. Perhaps someone has noticed the hints of a 0% coupon perpetual Japanese Government Bond which have emerged this week which is the nearest I have ever seen to the economics concept of “free money”. Of course they have not yet actually done this but in the current environment it seems feasible as of course it does appear that the spaceship described by Douglas Adams is currently in orbit around the Earth.
“Please do not be alarmed,” it said, “by anything you see or hear around you…We are now cruising at a level of two to the power of two hundred and seventy-six thousand to one against and falling, and we will be restoring normality just as soon as we are sure what is normal anyway. Thank you…”
There is much to consider today as we find ourselves considering hints and promises made by a man who is an “unreliable boyfriend”. Those who remortaged or took out fixed-rate business loans on the back of his Forward Guidance may well have rather unpleasant thoughts about the consequences. So we know that his Forward Guidance about interest-rate rises was useless which begs a question about Forward Guidance for cuts.
As regular readers will know I stood alone against the barrage of Forward Guidance forecasts of interest-rate rises in the media and by official bodies as it was back in December 2013 I first made my view know that a cut was as likely as a rise. It is awkward saying something will happen when you do not agree with it but these days I find I have a lot more company in that expectation! Have any of them issue a mea culpa? Surely someone must have?
As to other policy measures then an addition to the Bank of England’s £375 billion of QE is a possibility. I have felt that Governor Carney has given the impression that he is not a QE fan over his period of tenure at the Bank of England but of course the infinite improbability drive is in play. I feel that some version of a boosted/revived Funding for Lending Scheme is not far off a certainty but that may have to wait. That needs the permission of the Chancellor and would therefore have to be quite a rush job. Also that tends to be announced away from monetary policy meetings.
I will be updating this as the day progresses but as Douglas Adams pointed out whatever happens.
Update 2:45 pm
The correct decision was reached by the majority in the end as shown below.
At its meeting ending on 13 July 2016, the MPC voted by a majority of 8-1 to maintain Bank Rate at 0.5%, with one member voting for a cut in Bank Rate to 0.25%.
Those who have followed my analysis will not be surprised to read that Gertjan Vlieghe voted for a cut and became the first person to vote for a UK Bank Rate below 0.5%. If there was a surprise it was that Andrew Haldane did not join him in that. Maybe Governor Carney found a way of corralling the Bank of England insiders.
However in spite of the almost continual failure of his efforts at Forward Guidance Mark Carney tried Mark 21.
To that end, most members of the Committee expect monetary policy to be loosened in August.
Those are the same members who have been expecting a Bank Rate rise (from themselves) over the last two years or so! Truly we can say that the left hand does not know what the right hand is doing.
Yesterday I gave my thoughts on this to TipTV Finance.