The Bank of England is about to take economic centre stage

Today the Bank of England meets to set policy for the UK and it is the most “live” meeting since the early part of 2009. After a long period of dullness and ennui we have entered a new phase where we are now likely to see policy changes on Bank Rate and/or Quantitative Easing. As we progress I expect to see an addition to Credit Easing policies such as the Funding for (Mortgage) Lending Scheme, however it is not under the formal control of the Monetary Policy Committee as the Governor will decide it with the Chancellor of the Exchequer.

We have been discussing in recent weeks the design of the Funding for Lending Scheme (FLS) that you and I announced in our speeches at the Mansion House in June. ( Governor Mervyn King to Chancellor Osborne)

Unlike the ECB the Bank of England does not have a formal procedure for announcing such policies in the way that the ECB uses its press conference after its interest-rate announcement. Also it is in essence a two man operation albeit that neither of those responsible for the original FLS announcement are in office so we could see a tweak or two. But the fundamental point is that so far external members (4) of the MPC have been excluded from such discussions and in fact involvement of insider/core members has been ephemeral.

Whatever happened to Baron King?

Those who recall his critiques of banking and banker remuneration may have wondered about this.

As the Financial Times revealed on Friday, he has emerged as a senior adviser to Citigroup.

Apparently a near £8 million pension pot is simply not enough these days for a Baron about town. Also perhaps he meant his criticisms for British banks and American ones were and are fine. For someone often so keen to be in the news and media it was also odd that the news came out via the back rather than the front door.

Oh and as Michael Saunders of Citigroup is about to join the Monetary Policy Committee it looks a little like a revolving door style operation to me.

Economic Outlook

NIESR

The National Institute for Economic and Social Research has produced a report on the UK economic outlook and we should review it noting that after predicting 0.6% GDP growth for the second quarter of 2016 they are a batter in form so to speak. From the BBC.

The UK has a 50/50 chance of falling into recession within the next 18 months following the Brexit vote, says a leading economic forecaster.

We get a more specific forecast here.

Overall the institute forecasts that the UK economy will probably grow by 1.7% this year but will expand by just 1% in 2017….This would see the UK avoid a technical recession, typically defined as two consecutive quarters of economic contraction.

If we move to DailyFX we see that a contraction is expected in this quarter.

NIESR also said that the country’s economy is likely to decline by 0.2 percent in the third quarter of this year.

So the contraction is half that suggested by the flash business survey produced by Markit on July 22nd which suggested a 0.4% decline this quarter. As to inflation it thinks this.

With regards to prices, the institute expects inflation to peak at over 3 percent by the end of 2017.

Regular readers will be aware that I suggested the rise in UK annual inflation due to the post Brexit fall in the value of the UK Pound £ to be of the order of 1%. The NIESR also expects a rise in the unemployment rate to 5.7% so what used to be called the Misery Index ( inflation and unemployment added together) is on the march.

Policy Prescription

Again from DailyFX here is the NIESR prescription.

In these forecasts, the NIESR projected under the assumption that the Bank of England will reduce the main lending rate to 0.25 percent at their August meeting and then to 0.10 percent in November. Their analysis also suggests that a further round of £200 billion in quantitative easing could boost the economy by as much as 1.5 percent over the next 2 years.

The prescription seems to me to be an example of silly (cut to 0.25%), sillier (then cut to 0.1%) and silliest ( £200 billion of QE). There are good reasons to think that interest-rate cuts are not a stimulus when we are near to 0.%. Also a cut to 0.1% is just so obviously avoiding cutting to 0%! Nearly as bad is the fact that a the 0.15% cut implied is hardly likely to work if the the preceding  5% or so of Bank Rate cuts has not. Then we get to the silliest bit where we provide some £200 billion of QE with a ten-year Gilt yield of 0.8% to start with. What is that expected to achieve? One think it might achieve is to further heighten the crisis in final salary pension funds where deficits rise as yields (strictly corporate bond ones) fall. So as companies move to put money into the pension schemes to counteract the new “deficit” we see a contractionary effect on the economy.

One thing that the NIESR may have provided us with is a template for what Bank of England Chief Economist Andy Haldane told us.

Given the scale of insurance required, a package of mutually-complementary monetary policy easing measures is likely to be necessary. And this monetary response, if it is to buttress expectations and confidence, needs I think to be delivered promptly as well as muscularly.

In case you were left in any doubt as to when we got this

By promptly I mean next month, when the precise size and extent of the necessary stimulatory measures can be determined as part of the August Inflation Report round.

Andy is a curious chap as whilst he exclaims “More,More,More” and indeed “Pump It Up” he also tells us this.

And monetary policy of course needs to be mindful of the potential adverse consequences of administering ever-larger doses of the monetary medicine.

Purchasing Managers Indices

The last of these in the July series was produced this morning so let us take a look at it.

At these levels, the PMI data are collectively signalling a 0.4% quarterly rate of decline of GDP. “It’s too early to say if the surveys will remain in such weak territory in coming months, leaving substantial uncertainty over the extent of any potential downturn. However, the unprecedented month-on-month drop in the all-sector index has undoubtedly increased the chances of the UK sliding into at least a mild recession.

Thus they are a little more bearish for current economic prospects than the NIESR.

Comment

So as of late this afternoon UK monetary policy seems set to be on a different course although the vast majority of us will not know until 12 pm tomorrow when the official announcement is made. So in the gap there will be the danger of “some being more equal than others” and this change driven by Governor Carney was a mistake in my view for that reason. Official vessel are often leaky.

Also the Bank of England seems set to ignore its inflation target yet again. As the “looking through” of the rise in inflation in 2010/11 turned into an economic disaster via the sharp fall in real wages it caused the portents are not good. Just because there is pressure to “do something” does not mean that “something” will “do”. I would vote for unchanged policy as I waited to see how we respond to the lower value of the UK Pound £ which on the old rule of thumb has provided a move equivalent to a 2%  Bank Rate cut.

Meanwhile there is of course the issue of the fact that I have been forecasting that the next Bank of England Bank Rate would be down for over a couple of years now. Meanwhile the credibility of any Open Mouth Operations and Forward Guidance of Governor Carney falls and falls.

There’s already great speculation about the exact timing of the first rate hike and this decision is becoming more balanced. It could happen sooner than markets currently expect. ( Mansion House June 2014).

That was taken as a promise as it turned out to have the value of a pledge at best.

HSBC

It is a strange world at times where we are told banks need more capital and yet things like this take place.

Announcing a share buy-back of up to $2.5bn in the second half of 2016 (‘2H16’) following the successful disposal of HSBC Bank Brazil on 1 July 2016.

It was not as if the HSBC performance in the latest Euro area stress tests was anything to write home about.

 

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25 thoughts on “The Bank of England is about to take economic centre stage

  1. Carney was of course the originator of the Canadian house price bubble, which was why Gideon made him Governor of the BoE. That bubble is now so bad that British Columbia has brought in a 15% tax on foreign purchases of property in Vancouver. While such taxes should be welcome, it does illustrate what ‘hot money’ is doing in key markets – the danger of course is that the UK has already dropped 15% since the Brexit vote and is likely to fall further if the BoE cuts rates. If the hot money decides to go elsewhere, then alongside rising inflation, there will have to be a rate rise to stave off a sterling crisis similar to 1992. It makes no sense to cut rates now – a 0.25% cut would put a few quid in every borrower’s pocket while prompting savers to save more and companies to have to put more into pension funds.

    • ‘a 0.25% cut would put a few quid in every borrower’s pocket while prompting savers to save more and companies to have to put more into pension funds.’

      And therein lies the rub.All the cuts have done thus far is pummel velocity.All more cuts will do is……..

      It goes to show how overvalued economics degrees are these days.

  2. Hi Shaun,
    Good blog again, just the analysis you won’t read anywhere else in the media. I am with you on doing nothing at the moment and waiting to see what happens over the next few weeks/ months.
    However, the Bof E will want to show they are doing something and being decisive, so more of the same, which got us into this mess in the first place. Pity with our new status, the U.K. does not follow the herd and do something different – some hopes!
    Revolving doors? I bet MC ends up with one of the banks who are represented on his committee.

    • Hi Foxy and thanks

      If they cut now then the full impact will not be until early 2018 when the world may well look very different. Also as I wrote in the article above there is the issue of whether a Bank Rate cut is a stimulus so close to 0%.

      As to the Governor I have longed believed he wants Christine Lagarde’s job as head of the IMF and now wants to stay on with the BoE until 2020. Guess what that coincides with?

  3. Shaun,
    HSBC attempting to support share price as recent results disappoint?
    Thereby encouraging punters looking for real returns as share price rises – expect the issue of more debt so further share buybacks possible perhaps?

    • Hi Chris

      I agree with you that the plan seems to be that. But there is a weakening of HSBC as debt replaces equity. I know in the modern era that the two concepts are supposed to be merging but I do not see that surviving a genuine crisis do you?

      It feels a little like a cannibalisation of the bank to me to the benefit of the directors/managers.

  4. These moves in respect of a boost to economic activity are irrelevant, as you say; indeed I would go further and say quite unnecessary.

    However, they are dangerous because they may further pump up the “bubble” economy (IR cut) and they will increase the QE stock which means that winding this down becomes an even greater problem than it is now ( and about which no central banker has a clue).

    The one thing which will be relevant to an economic slowdown or recession is something you didn’t mention: the operation of the automatic stabilisers. Fiscal policy will also be reinforced by the ditching of the absurd political stunt that was the GO fiscal charter. This will be a major factor in keeping things afloat during any downturn.

    Furthermore, as you say, the Brexit fall in the £ will also give some shot to the patient.

    They will indeed “look through” inflation because they cannot do anything else; there is far too much private sector debt and this is increasing.

    In Carney’s term this is BAU; quietly making things worse under the guise of action. Mean while the true heavy lifting will be done by fiscal policy and the exchange rate.

    I will make a prediction: Carney will only serve one term and he will rejoin GS. In other words I think the real trouble will start in just under two years time.

    • ‘there is far too much private sector debt and this is increasing.’

      Their models don’t include private debt according to Steve Keen,which jsut goes to show how dangerous an economist can be.

  5. Hi Shaun
    I guess Carney ( sorry the ‘independant committee’) will do what Yellen whispers in his ear to do. If he does nothing then its pretty likely Yellen is finally , finally going to start rate increases. Is it too much to hope for?

    • Hi JW

      I think that there are various fashions for our dedicated follower of them tomorrow. The ECB may ease again and so may the BoJ and the Federal Reserve seems to want to raise but have they left it too near to the election? Also as I know from painful experience at times of trading Bank of England meetings a slice of humble pie can be served to all.

      Your scenario would however be better than the one I expect!

  6. heh , be funny wont it

    all the other times they’ve been expected to raised or lower the interest rate theres been Masterly inaction

    Now when they dont need to they take action ?

    I wonder if they have the balls to drop BoE rate to -0.5% ? or a wimpy 0.25% ?

    Who will gain and who will loose – follow the money —–> Our glorious Banking Masters of the Universe win again !!

    Forbin

    • Those parasites get their loot and an inflation proof pension whether they do nothing badly or well.

      Rewards for failure underpin the UK banking sector and the CB is no different.

  7. Wondering about the contradictions of the Markit survey by lots of other things but it is Markit that seems to be the headline grabber. The CBI produced a report today which directly contradicts Markit on manufacturing but it is the latter that gets the headlines. If CBI etc are true then there should be no rate cut immediately. It is better to wait and see. The only benefit of a rate cut would be to give confidence to the people surveyed by Markit who say something different when they are interviewed by the CBI or the BOE agents. Eh.

    • Hi am

      The picture is complex and sometimes the business surveys only create fog. As the credit crunch developed the Markit PMI had a good run but they are not as good now and there have been embarrassments in Ireland in particular related to the size of pharmaceuticals there.

      Does an interest-rate cut give confidence especially after so many Forward Guidance inspired False Dawns for rises?

      • Hello
        I think it is just to be seen to be precautionary because of the fog. But the government is not doing enough. I don’t mean an emergency budget but making sufficient pep talk statements for folks to just get on with their lives and don’t be listening to every doom and gloom survey when other reports are reporting the reverse.

  8. ‘Apparently a near £8 million pension pot is simply not enough these days for a Baron about town.’

    ‘Merv the swerve’ one of the many that helped create the backdrop for the crisis and still not manage to see it coming.Not quite sure what Citi are getting from the deal.

    ‘There are good reasons to think that interest-rate cuts are not a stimulus when we are near to 0.%’
    x2

    ‘Then we get to the silliest bit where we provide some £200 billion of QE with a ten-year Gilt yield of 0.8% to start with. What is that expected to achieve? One think it might achieve is to further heighten the crisis in final salary pension funds where deficits rise as yields (strictly corporate bond ones) fall. So as companies move to put money into the pension schemes to counteract the new “deficit” we see a contractionary effect on the economy.’

    Great stuff Shaun.It amazes me how often your readership on here thank you for stating the obvious,which sort of goes to highlight the poverty of the offerings from the MSM which seem mainly geared to getting EA’s to advertise overpriced houses with them.

  9. We need to raise rates,get savers spending again,let the weak hands in the property market go bust,stop subsidizing bank bonuses and get back to making/trading things again.

    We need to bring some integrity back to our financial statistics and most importantly ,back to our banking sector.

  10. I’m afraid we’re bankrupt and in decline, like much of the West, with a massive and growing chunk of the populace directly dependent on the life-giving munificence of the state. There is no productive, well-paid industry to suck all these people up, hence our dependency on credit, asset-based wealth and low-quality employment. And there has been no serious austerity since 2008, quite the reverse. It’s either massive drops in standard of living – think power cuts, Austin Metros a luxury and a Mars bar, a satsuma and a Victor for Boys annual being your lot at Noel – or several further rounds of QE, which might begin tomorrow, until the currency and debt levels are debased beyond all reckoning and we get the same result. A massive, decade-long public-works program from the govt might be one way out – calls for this from some of the progressives – but it aint looking good in the US or the Eurozone – does anyone really believe we’re due another bout of genuine economic growth?

    • Hi Peter

      An Austin Metro a luxury? I am not sure that younger readers will quite realise what a dystopian future you fear! Don’t forget that in such a scenario your Mars Bar would suffer from ever more shrinkflation either.

      The trouble with fiscal policy is that we have run deficits as it is.

  11. Why do BoE need QE when they have FLS??

    FLS has been around 12 Billions per quarter since around April 2013!

    QE never went away. I honestly don’t see any rate rises EVER under the present currency system.

    • thanks for for your feedback.
      FLS adds to the credit encouragment with the banks, I guess so that the highstreet banks are not constrained by prudency ratios. I think QE enables the continuous funding of deficits, even under austerity we’ve had to borrow more, QE acknowleges that the repayment will be far away enough to be considered as effectively irrelevant to current politicians and many voters.
      Given that a drop is futile and ineffective, a marginal rise would be an attempt to “box out of a corner” otherwise we may as well all give up on market capitalism and lie prostrate as the state finances ever higher excesses of manipulative policies without democratice recourse. Indeed the decision today sets a trend for Britain out of Europe , what kind of lies do we want to live in…
      A run on sterling would force a rise in IR’s, are we to wait for that ignominy?

  12. Pingback: Bank of England interest rate decision – business live – Hub Politic

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