Yesterday saw a Deputy Governor of the Bank of England – at least for now as she is on her way out – toe the party line as we were told this by Dame Nemat Shafik.
the process of adjustment can sometimes be painful. That’s where monetary policy can help, and it seems likely to me that further monetary stimulus will be required at some point in order to help ensure that a slowdown in economic activity doesn’t turn into something more pernicious.
Actually it is perfectly reasonable to argue that all the monetary stimulus since the credit crunch has begun has harmed both reform and adjustment. Also more than a few people would point out that back in the day the starting point as described below was supposed to be an emergency response.
What is unusual about this particular loosening relative to previous cycles is its starting point. Despite many real economic variables having returned to around normal levels following the financial crisis the absence of any signs of overheating or inflationary pressure meant that at the time of the referendum Bank Rate was already at an all-time low of 0.5% and we held a stock of £375bn gilts on our balance sheet.
In the question and answer session following she repeated her view that more stimulus and rate cuts would be needed in spite of a confession that so far things had been better than she expected.
For example, Bank staff have revised up their forecast for the mature estimate of GDP growth in Q3 to 0.3% from 0.1% at the time of the August Inflation Report.
Indeed she could not resist a really downbeat view which in the circumstances was none too bright.
Asked by Bloomberg Editor-in-Chief John Micklethwait if there was any positive impact from Brexit, Shafik paused. Her offering? The sunny summer enjoyed by Britain.
“The weather’s been really good since the referendum,” she told the audience at the Bloomberg Markets Most Influential Summit in London.
A problem for her view
As I pointed out the weekend before last on BBC Radio 4’s Money Box the simple fact is that the fall in the UK Pound £ is a much bigger factor for the UK economy than the Bank of England moves. As of the latest update on our effective or trade weighted exchange rate we have received the equivalent of a 2.5% cut in Bank Rate or as I put it on the radio a “Bazooka” compared to the “peashooter” she and her colleagues deployed with a 0.25% cut. The £60 billion of QE has pretty much been offset by a rise in pension fund deficits and the Corporate Bond QE seems to be as much for foreign firms as UK ones.
What about the money supply?
If we step back in time then UK monetary policy was once directed at growth in the money supply and in particular broad money. That had its issues as the measure used called £M3 was flawed ( for example it did not cover the building society sector which was becoming a larger player) and also because the causal relationship was between it and both economic growth and inflation. The mixture of the latter was variable but of course these days the Bank of England is trying to push both higher. So in this way we see that the modern measure of broad money is something it should be watching.
This morning we were updated on the state of play.
UK broad money, M4ex, is defined as M4 excluding intermediate other financial corporations (OFCs). M4ex increased by £2.9 billion in August, compared to the average monthly increase of £14.1 billion over the previous six months. The three-month annualised and twelve-month growth rates were 10.9% and 7.3% respectively.
You may note that there was a slowing in August but you see in some ways it was a surprise it grew at all after the surge we saw in July.
M4ex increased by £25.4 billion in July,
I looked into the detail and noted that of this some £15 billion or so was moves in the financial sector such as insurance companies and pension funds. So would in reverse in August as we moved into calmer waters? On that road we might have seen a contraction this month and maybe a sizeable one but whilst the rise was small there was one.
Another way of looking at the data is to examine bank lending so here it is.
M4Lex is defined as M4 lending excluding intermediate OFCs. M4Lex increased by £5.0 billion in August, compared to the average monthly increase of £12.1 billion over the previous six months. The three-month annualised and twelve-month growth rates were 7.2% and 6.6% respectively.
This was slightly faster in size than in July and whilst the 3 month rate dipped the annual one edged higher.
Now if we take the official figures the UK is growing at an annual rate of maybe 2% and inflation is even on the RPI measure just below 2% so we have if we are being pretty generous 4% against money supply growth of 7.3% or bank lending growth of 6.6%. So those who use the broad money supply would not be pushing the monetary stimulus trigger. For those who think that growth is lower and follow the official inflation measure then their numbers may only add to 2% and old era theories of central bank behaviour would be considering a Bank Rate raise.
These are broad brush numbers but you get the idea. As the outlook is for them to provide an economic boost then further efforts if UK past history is any guide are likely only to push inflation higher.
Today was not a day for the narrow money numbers but I did spot that a component of it is rising fast and after yesterday’s update on the war on cash it raised a wry smile. You see the retail deposits and cash component of M4 was rising at an annual rate of 7.1% in August as compared to 5.2% in January.
What about credit?
There was a time that numbers like these below would have the Bank of England going from yellow to red alert.
Consumer credit increased by £1.6 billion in August, broadly in line with the average over the previous six months. The three-month annualised and twelve-month growth rates were 10.4% and 10.3% respectively.
There is much to consider in the money supply data for the UK. There is always a caveat emptor with it as the effects from it can be long and variable and we have just had an economic change. However if you brought a Martian economist to Earth and asked he/she/it to offer a view in monetary policy they would be more likely to recommend a tightening than an easing. My view is that as the UK was already receiving a large boost from the lower level of the UK Pound it should have waited for more data.
Sadly central bankers these days suffer from a lot of control freakery along the lines of this from Biffy Clyro.
I gave birth to a fire
It’s like its features were burning
I’m in control
I am the son of God
In reality of course if they really had the power they claim we would not be where we are some 8/9 years into the credit crunch era. Still Dame Shafik was kind enough to confirm my “To Infinity! And Beyond!” theme. From @DeltaOne
BOE SHAFIK: QE UNWIND DOES LOOK A VERY LONG WAY AWAY