It is one of the themes of this blog that official interest-rate cuts do not always have a beneficial impact on the economy. To be specific once we go below a range around 1.5% to 2% the effect fades and dies in my opinion. That of course is a critique of those at the Bank of England who want to cut Bank Rate further such as Governor Mark Carney and even more so of the “muscular easing” proposed by its Chief Economist Andy Haldane. Overall the latest official minutes told us this.
To that end, most members of the Committee expect monetary policy to be loosened in August.
However someone who I have praised in the past for at least doing some thinking is Kristin Forbes at the Bank of England. She has demonstrated this again overnight in an article published in the Daily Telegraph. This makes its point starting with the headline.
Wait for Brexit fog to clear before interest rate cut
She even evokes the World War 2 message of Keep Calm and Carry On as she points out this.
The largest price movements have since moderated. Sterling has recovered one quarter of its post-referendum fall. Most major global stock markets (including the FTSE) are now higher than before the vote.
In the real economy she points out that contrary to past Bank of England rhetoric there was an apparent pick-up in the economy in the second quarter of this year.
And complicating any assessment, the economy was quite solid before the vote. May forecasts predicted growth in the second quarter would slow to 0.3pc, but the latest data suggest it strengthened to double that.
It is hard not to have a wry smile at the fact that many of those who are so sure of the future right now have just got their forecasts wrong again. Some humility please. Kristin sees a two-way pull on the economy.
Uncertainty may cause businesses to delay hiring and major new projects. Sectors that involve long-term commitments or major expenses—such as commercial real estate and housing—will undoubtedly be hurt……..Some companies could also benefit—such as exporters who gain from sterling’s depreciation.
Indeed we also get a critique of the panicky response at times exhibited by Governor Carney and indeed Andy Haldane.
This is not 2008. Then markets were collapsing, the financial system stopped functioning, and the global economy was entering a recession. This is not a “Lehman moment”.
The case against a Bank Rate cut
We are reminded that there are costs to monetary easing and not just benefits.
Unfortunately, easing monetary policy not only has benefits, but also costs.
Two are very familiar on here. There is an individual impact.
People will earn less on their hard-earned savings—potentially cutting back on spending to reach a target savings pot.
Also there is a corporate impact.
Pension and life insurance funds will have a harder time meeting their commitments. Companies may need to put more money into pension schemes—leaving less to spend on workers and investment.
It is way past time to change the rules on final salary schemes as for a start negative yields will blow them up. However when I press for this all I get is silence. The sort of silence I got when I pointed out that negative interest-rates were coming or that the Bank of England was more likely to cut than raise next.
Also of course every central banker worries about “the precious”.
Banks will make less money on lending—potentially making it harder for consumers and businesses to get loans.
You may note that the worry about the banks is dressed up as being a worry about the rest of us. Actually this is one area where I differ with Kristin. The latter bit about loan availability may or may not happen but in Sweden the banks have used negative interest-rates as an opportunity to widen margins in some cases to record levels I believe. “The precious” remains rather good at looking after itself.
There is also the cost from likely higher inflation as I discussed only on Tuesday. Here is Kristin’s estimate.
Historical relationships suggest sterling’s 15pc depreciation from its recent high will increase the price level by 2.5pc.
The 15% statement is slightly odd as you see the chart she has agrees with the 10% fall I have used. So on a like for like basis I would have suggested a 1.5% rise in inflation or she would suggest 1.7% on my basis.
We get a reminder that the Bank of England is supposed to support economic demand whilst aiming for the inflation target.
We face a trade off between supporting demand and our inflation target.
These emerge with interesting timing after the way that Ms Forbes pointed out that consumers behaviour was going to be very important looking forwards.
Since consumer spending is over 60pc of total demand, this will provide an important support to the economy if it continues.
We found out that annual and quarterly growth remains strong.
The volume of retail sales in June 2016 is estimated to have increased by 4.3% compared with June 2015…….The underlying pattern in the quantity bought, as suggested by the 3 month on 3 month movement, increased by 1.6%….There has been sustained growth, spanning 31 months in the 3 month on 3 month movement in the quantity bought: the longest period of growth since records began in June 1996.
However there was a month on month fall.
Compared with May 2016, the quantity bought in the retail industry is estimated to have decreased by 0.9%.
This is already being presented as “the end of the world as we know it” in some quarters but if they bothered to read to the end of the report they would have seen this.
The largest downwards contribution for both quantity bought and amount spent came from food stores.
Whereas a Brexit dip would presumably be in discretionary spending categories. Also some of it was a pre-existing trend and let me put on sackcloth and ashes for mentioning the weather in an economic context.
According to the British Retail Consortium, there was a decline in sales in the fashion categories, especially in women’s fashion and footwear, following one of the wettest starts to a UK summer since records began.
We use these as a guide to economic health in the sense of how much a government gets in revenue and receipts is another type of insight into the economy. We start with some positive news.
Public sector net borrowing (excluding public sector banks) decreased by £2.2 billion to £7.8 billion in June 2016, compared with June 2015.
Hopeful and some of the better news was driven by this.
Income Tax-related payments increased by £0.7 billion, or 6.3%, to £12.2 billion.
Some care is needed as in the previous two months it had disappointed. Oh and another theme of this website popped up.
debt interest in June 2016 decreased by £0.8 billion, or 19.0%,
Whilst our national debt continues to rise Gilt yields have fallen heavily and combined with lower RPI inflation have more than offset it.
This is a welcome and in some senses overdue intervention from Kristin Forbes on the impact of official interest-rate cuts and monetary easing. Back on July 1st I pointed out that her past speeches were likely to lead her to such a view. This clearly begs a question as to whether in reality she signed up to the claims and rhetoric of Governor Carney. Meanwhile the Bank of England’s Chief Economist has been on BBC Radio 4.
“Low rates & large asset purchases can stimulate prices of risky assets, encourage risk taking”
“Little evidence of bubbles since financial crisis”
I do hope that he was not telling us there is no evidence of bubbles from Central London! Oh and aren’t those two sentences contradictions in terms? Was he to be found bopping to disco queen Kim Syms in his youth?
Too blind to see it
Too blind to see what you were doing
Too blind to see it
Too blind to see what you were doing
Anyway there are other central bankers in the news as we look east to Nihon. From Francine Lacqua.
Kuroda Says No Need and No Possibility for Helicopter Money
What happened last time he denied something 8 days before a Bank of Japan meeting?