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.
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.
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.
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.
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.