The unreliable boyfriend takes center stage at the Bank of England

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.

Shadow MPC

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.

https://notayesmanseconomics.wordpress.com/2016/07/04/uk-fiscal-policy-is-setting-off-on-a-magical-mystery-tour/

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…”

Comment

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.

Don’t Panic

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.

 

 

Television

Yesterday I gave my thoughts on this to TipTV Finance.

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28 thoughts on “The unreliable boyfriend takes center stage at the Bank of England

  1. I was trying to think of something, anything, Mark Carney predicted that came true, some guidance he gave that was proven to be reliable and something he said that was not spin- I gave up!

    • One of the problems of remainers who participated so obviously in Project Fear is that they:
      1. Didn’t win the vote
      2. Predicted things that didn’t happen (eg that the stock market would be suspended, emergency budget, interest rate rises to protect pound, falls to defer crash, world war 3 etc)
      Had remain won, these predictions would never have been exposed to reality and tested by events. As remain lost, we now have the hilarious sight of these “experts” having to watch their predictions unravel.
      At least it is all entertaining.

  2. I think Mark has proven to be an excellent decoy or shill for HMG

    Why do we “need” 0% rates now ?

    Wasnt our GDP good enough ( for that matter Sweden showed me that the economy must be now divorced from CB interest rates , if Japan hadnt done it before )

    We still know the main banks are too big to fail even after years of support but our leaders still cannot admit that they were wrong .

    Carney will not admit his proclamations are wrong , why should he ? MSM have all the attention span of a mayfly ( Squirrel! ) .

    I’d posit we have the excuse they need to pump more QE/QQE and EQE /SQE forever.

    Radical? raise interest rates to 1% and see if thats radical enough Mr Comical Carney , the Bagdad Bob of the BoE …..

    Instead we will get the anticipated 0.25 or 0% rate ( even -0.1% ? )

    Forbin

      • Hi Forbin

        Yes Sir Humphrey Appleby would be extremely pleased. In fact he would probably send an inter-departmental memo congratulating them on their masterly inaction on Bank Rate for over 7 years now.

        As to lower interest-rates I think that they are likely to make things worse rather than better.

  3. How can Carney not have voted for a cut after his statements of the last couple of weeks – In my 30 years of being involved in interest rate markets, this is the most shocking mis-guidance by a Central Banker by a country mile, how is he still in post?

  4. In response to a possible economic slowdown caused, in part, by rising import prices, the BoE plans to lower interest rates. One of the hoped-for beneficial effects is to lower the exchange rate. Doh!

    Also, didn’t the last couple of countries to lower their base rates see their currency appreciate? Perhaps it’s a double bluff?!

    • Hi DoubtingDick and welcome to my corner of the online world.

      Many of what were regarded as economic rules have broken down in the credit crunch era including latterly market responses to central bank moves as you say. But like First World War generals the central bankers plough on as after all the pain is kept away from them.

  5. Great blog, Shaun, as always.
    The Bank of Canada made its interest rate announcement yesterday, with the publication of its July Monetary Policy Report, similar to the Bank of England’s Inflation Report:
    http://www.bankofcanada.ca/2016/07/mpr-2016-07-13/
    It kept the overnight rate unchanged at 0.5%. Everything it does is opaque, so no-one knows if there were any dissenters among the senior bankers with this decision as one does for Bank of England rate announcements. However, the C.D. Howe Institute which always holds a meeting of its Monetary Policy Council in advance of BoC rate announcements, had one of its nine members vote for a cut to 0.25% in July and two other members vote for a cut to 0.25% six months from now. No-one had been in favour of a cut any time over a 12-month horizon at the previous meeting in May.
    Some of your readers may be interested in the box on p. 2 of the MPR, which analyzes the impact of Brexit on the world economy and the Canadian economy. The BoE has dropped its forecast of real GDP growth for Canada in 2016 from 1.7% to 1.3%. Most of this downgrading is not due to Brexit but to the impact of Alberta forest fires on oil production in 2016Q2. The BoC forecasts, somewhat heroically, that all of this production will come back in 2016Q3.
    It seems the BoC wants to streamline its MPRs, which already provide a lot less information than the BoE’s Inflation Reports. One thing they have already removed is the chart showing core inflation (chart 16 in the April MPR). Canada has the highest core inflation rate of any country in the G-7, and it seems the BoC does not want to draw much attention to it. This may only be wishful thinking, but the BoC may also be rethinking its dysfunctional proposal to downgrade CPIX as the main measure of core inflation with the renewal of the inflation-control agreement this year.

  6. Hi Shaun

    I think all these pronouncements have an air of unreality about them. We as a country are hugely in debt, both public and private and any interest rate rises would simply tip the whole thing over.

    There is an implicit message in the history of Carney’s statements and that is that the further we are from 2008 the nearer we are to a sustained economic recovery and therefore to the point where rates can be “normalised”. But both public and private debt has increased substantially since 2008 and to my mind that means that we are not nearer rates being normalised but actually farther away, no matter what Carney says. The only way rates will increase is if they are forced up, most likely through a sterling crisis, and this is the ultimate truth at the back of everything.

    • Hi Bob J

      Interest-rate rises can happen in the modern era but mostly they are a response to a crisis such as in Ukraine, Brazil or many African nations. This evening I noted a report saying the benchmark Brazilian yield had fallen below 12% and the Turkish one below 9%. But these days as you say these things have to be driven by a crisis.

      So far the US Federal Reserve has not even made the 2 interest-rate increases of the ECB in 2011.

  7. Bob , I completely agree, a sterling crisi is the only way to normalise interest rates in the UK or a concerted CB action led from US to do so. That US inititative has foundered. I calculate that Mark Carney should be able, via his vampire squid contacts be able to negotiate a stay of execution for sterling. He will seek to discover support for our currency What to watch for as Bank of England rules on interest rates – http://www.ft.com/cms/s/0/d266811a-484b-11e6-8d68-72e9211e86ab.htmlfrom BoJ, the Fed and even ECB on the basis that if we go it alone with a forced rate rise then it could trigger the final sum or reset for all the CB’s. Following that support then the UK will be able to pursue both NIRP and QE to infinity….

    • Paul

      You’re right . the direction of travel is taking us to NIRP and more QE.

      So far NIRP has been of the “mild” type mainly resulting in higher IRs to borrowers. If it gets serious, and it may, and impacts on the ordinary saver I believe we’re in the end game. Apart from putting up effective IRs and piling more pressure on the banks it will only work by banning cash and that is tantamount to a serious restriction of civil liberty. IMV insanity. It will not end well.

  8. It has been worrying and amusing to hear Cameron sycophants declaring that his achievements include a “prosperous economy” – one that has been on 0.5% rates throughout his tenure and which the Governor expected to require a further cut to 0.25%!

    It is just idiotic anyway – the difference on a 0.25% fall will be about £25 a month. It will not change demand levels and of course, its only purpose is to make mortgages “more affordable” (helpfully ignoring the rise in the capital amount you have to borrow) to jeep the market inflated. At the same time, the GBP will stay down at USD1.33 and 1.20 thereby raising import costs and subsequently, inflation – when Carney will declare it is a Brexit blip, do nothing and let inflation eat into living standards while wages continue to stagnate.

    All in the name of the fake housing bubble – which Carney’s new master will do no more about than the last one.

    • I agree with you about Cameron. One thing he and Osborne did that Shaun has written a lot about is debased the UK inflation measures. The powers that be more or less accepted the need to incorporate an owner-occupied housing component based on net acquisitions into the CPI as the Bank of England’s target inflation indicator before he took office, and it was just when it would happen that was at issue. There was (my view) or wasn’t a formula problem with the RPI used for upratings, but it should have been possible to reform the RPI if necessary with some kind of accommodation for gilt holders. It was the Cameron government that started replacing the RPI with the CPI for upratings and now it isn’t a national statistic any longer surviving on life support. And it seemed to be heading towards making the CPIH the one go-to index for all purposes, both upratings and as the target inflation indicator of the Bank of England. Now there is a PM and a Chancellor of the Exchequer whose fingerprints aren’t on any of these policies, so hopefully they will have no qualms about reversing them.

      • Interesting piece, but actually no great revelation! “Both the Germans and the Swiss rightly see the way to get rich as investing in profitable businesses so that they can export to the world.” – I basically said this in a little piece I wrote in 1979, when aged 17! Of course, the “experienced” elders knew better.
        Germany and some of its neighbours know that not having a funny money economy, while keeping a tight rein on credit availability (so rate moves do not affect asset prices much) and taxing the unproductive gains are how you incentivise genuine effort and skills. Or as Ruth Lea (Brexieter economist, one of the few they had!) put it “the Germans and Dutch educate their workforces, so we have to work longer to compete” (or dole out cheap credit to speculators and flog flats to Russian oligarchs!).

  9. Shaun,

    As usual, you are way ahead of the curve. I’ve just been reading economists’ reactions on The Guardian web site and this one from Alan Clarke, Scotiabank, caught my eye and appears to agree with you. Over to Mr Clarke (oh, and after reading the first sentence, I wonder if he reads your blog!), “Alan Clarke, UK and eurozone economist, Scotiabank
    The return of the unreliable boyfriend:
    If ever there was a case for abandoning forward guidance and central bankers keeping quiet, this meeting is it. Virtually nobody was going for a rate cut at this meeting before Carney’s intervention a couple of weeks ago. Most assumed that the weakness of the pound and the need to wait for incoming data would lead to a pause at least until August. But for no apparent reason, governor Carney decided to tease the market, let it price in a high probability of a rate cut, only to disappoint. As if the situation wasn’t volatile and uncertain enough, the BoE governor poured petrol on the flames. This was a completely unnecessary intervention.
    The governor may well argue that the point of forward guidance is for households and businesses and not just financial markets and that the latter should know better. But quite frankly, the governor should know better; he should know that the markets are super-sensitive to BoE communications.
    The majority of members judged that loosening would be appropriate in August. Why wait?!? They also discussed what form that might take, hence the combination of a rate cut and unconventional policy easing seems likely.”

    Robert S

    • Hi Robert S

      It all sounds rather familiar doesn’t it? So thanks for pointing it out.

      As to Governor Carney I think a period of silence would be in order otherwise even the slowest to pick things up will notice that he keeps giving forward Guidance in the wrong direction. Therefore treating them like the Muppets were/are by his previous employer the Vampire Squid.

    • Hi Eric

      There are some lyrics for this from back in the days of Glam Rock.

      “Does anyone know the way, did we hear someone say
      We just haven’t got a clue what to do
      Does anyone know the way, there’s got to be a way
      To Block Buster”

      The Sweet

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