Problems are mounting for the Bank of England

We find ourselves in a phase which is proving very difficult for the members of the Bank of England Monetary Policy Committee as well as the Governor Mark Carney. This is on two main fronts. The first is that they eased monetary policy into a sustained fall in the UK Pound £ on the foreign exchanges and the other is the related issue of yet another forecasting failure. Associated with this is the promise to ease policy even further in the future in the face of an expected rise in inflation. From the August meeting minutes.

If the incoming data prove broadly consistent with the August Inflation Report forecast, a majority of members expect to support a further cut in Bank Rate to its effective lower bound at one of the MPC’s forthcoming meetings during the course of the year.

The rhetoric back then was of “further action” which seems to have disappeared.

The issue of central banker pay has also been raised by Bloomberg who told us this.

When It Comes to Central-Banker Salaries, It Pays to Be Belgian

It goes on to tell us this.

The central bank governors of Belgium, Italy and Germany make more than the ECB president’s annual 386,000 euros ($409,400), data compiled by Bloomberg show. Belgium’s Jan Smets took the crown with about 480,000 euros, almost six times as much as bottom-of-the-list Vitas Vasiliauskas of Lithuania.

Later on it seemed to occur to them that some earned more than this and this was added.

Bank of England Governor Mark Carney earns 480,000 pounds ($599,000) plus housing benefits

Housing benefits is an interesting euphemism if you look at the accounts of the Bank of England.

Mr Carney receives, as was announced on his appointment, an annual accommodation allowance of £250,000p.a., to reflect the additional cost of living in London rather than in Ottawa.

As that on its own is more than US Federal Reserve Chair Janet Yellen receives in total you think it might have been noted in more detail. Also a report that points out that the also well paid Thomas Jordan of the Swiss National Bank “gets an annual train pass” might note this for Governor Carney.

with membership of the Career Average section of the Bank Pension Fund or 30% of salary in lieu.

As of February he has accrued already a pension of £20,000 per annum indexed to the Retail Price Index at age 65. Not bad as we wonder why the “not a national statistic” RPI as opposed to the officially targeted CPI is used? As it is the only area where I can think of where Forward Guidance has worked perhaps lessons can be learnt here, or perhaps not.

Crystal Balls

This has been a big issue this week as we see forecasts from the OBR ( remember the first rule of OBR Club) and the Institute for Fiscal Studies or IFS. The IFS does much good work but please also recall its head Paul Johnson was responsible for the botched UK Inflation Review and I still remember him leaving his own public meeting early claiming a diary mix-up. How is the Bank of England Crystal Ball doing? From Kristin Forbes on Wednesday.

In fact, average GDP growth over the quarters of heightened uncertainty directly before and after the UK referendum on EU membership has been stronger than for all of 2015. It has even been above what is generally believed to be the UK’s potential growth rate.

Hang on so it cut interest-rates and introduced more QE because we were doing better? Let us look in more detail and the emphasis is mine.

UK economic performance has been solid. Quarterly economic growth has picked up from 0.4% in Q1, to an average of 0.6% for Q2 and Q3. This is well above the consensus expectation by economic forecasters, as well as the MPC forecast…………. In both Q2 and Q3, actual GDP growth was substantially higher than forecast (by 0.4pp).

Do you like the way that being wrong is apparently okay as long as others were? No mention of places like here which were more sanguine or indeed those of you in the comments section who were also more sanguine. If so many economic forecasters get it wrong are we seeing a tyranny of the majority to coin a phrase?

I have praised Kristin as being the brightest member of the Bank of England but this stating of the obvious falls below such standards.

What have we learned? Measuring uncertainty is hard.

Really? But at least she musters a sense of humour.

There is much uncertainty about uncertainty.

However there is one more tale of woe for Bank of England forecasting.

Most business surveys suggest that some companies are already delaying investment, or expect to do so over the next year.

Let us skip to today’s update ( 2nd estimate) on UK GDP.

Gross fixed capital formation (GFCF), in volume terms, was estimated to have increased by 1.1% to £79.0 billion between Quarter 2 (Apr to June) 2016 and Quarter 3 (July to Sept) 2016.

So far up is the new down again.

Rather breathtaking

Earlier this week the Daily Telegraph reported this.

Economists are too detached from the real world and have failed to learn from the financial crisis, insisting on using mathematical models which do not reflect reality, according to the Bank of England’s chief economist Andy Haldane.

So a man who has only ever had one employer which is the Bank of England and accordingly exists in its Threadneedle Street bubble is telling others about the “real world”? Also as he is in effect as Chief Economist responsible for the (failed) mathematical models of the Bank of England and has unleashed a “sledgehammer” of monetary easing in response to what they have told him how does this work exactly? Even worse his models have so far been wrong (again).

Corporate Bond QE

This was always going to be problematic as the UK £ Corporate Bond market is not well-developed. Still Apple may need the money or perhaps not if we look at its cash pile. Still supporting the German car industry via buying the bonds of BMW and Daimler…..


There is a simple issue here which is that the Bank of England made forecasts and acted on them. But where is the accountability if they go wrong? Of course things might deteriorate in 2017 and one clear area is the rise in inflation I expect. The problem here is that the Bank of England is supposed to be targeting inflation rather than looking through another “temporary” rise that it so disastrously did – think real wages – in 2010 and 2011.

Ladies Coats

This is an area I am looking into and have received some fascinating replies about on the Royal Statistics Society website. Why? Well they have no lining this year I am told ( sometimes with emphasis and detail) and this made me wonder how statisticians apply the quality mechanisms we are told about. If I can summarise in one sentence it is this from Jill Leyland.

We urgently need ONS to pick up and extend the research done in 2011/2012.

Yet we quote and analyse inflation and GDP to 0.1%.



29 thoughts on “Problems are mounting for the Bank of England

  1. Worth doing a tabular comparison on ons data and boe inflation report data: gdp; ue; prices would be a start. Basically they get away with it because people move on to look at something more topical or just can’t be bothered rather than look back at previous projections and compare them to the actual data. The Treasury Project Fear short run is another case for detailed comparison to actual ons data. In addition, few, stand up and say they got it wrong.
    So credibility is retained and continued pronouncements are received as credible because they escape proper investigation and exposure for previous blunders.

      • the issue is that the establishment have figured out that MSM has the attention span of a Mayfly

        announce bad stuff today but it wont come into effect until next year …. ( Dory Syndrome? )

        also to keep re-adding in stuff you said you’d do or spend last year into this year’s report ( some are catching on )

        HMG needs to make BoE accountable but they won’t because BoE Independence is a joke…….


  2. So mark has a vested interest in increasing inflation with index link pension to RPI

    taxes are also linked to RPI

    bennies are linked to CPI …..

    If I did that I would be held to account on criminal behavior…


    • Hi Forbin

      I completely agree that those who set the rules for everyone else should also live by them as well. It is also another reason why I expect CPIH to be a train crash when HM Treasury finally thinks it through.

  3. Great stuff, Shaun.
    While I have no time for Carney or, indeed, vampire squid alumni generally, I think that his salary is more defensible than those of the central bankers of Belgium etc. A serious question is, now that these countries are in the Euro, with its own central bank, what on earth do these national governors do all day?
    I imagine a rather gruelling day of:
    1. Chauffeur to work;
    2. Catching up with the papers;
    3. Perhaps a coffee or two;
    4. Then it is time to lunch with someone equally important;
    5. Siesta, obviously;
    6. Chauffeur home.
    After all, they cannot set interest rates, determine the money supply, initiate QE. So, what do they do all day?

  4. When you boil down what you are describing, it seems like:
    1. The BoE is hopeless at forecasting;
    2. It does not apply policies in any case that would relate to its forecasts even if they were right;
    3. It has simply decided that the policy is low interest rates through QE and invents any number of stories to give this an air of plausibility;
    4. It couldn’t care less about how this is cleared up, if ever.
    Am I being unfair?

    • Hi James

      I think that there are some subsets to point 4 as they are spilt into groups.

      a. Some are way out of the depth and are therefore left with only the hope that the music will still be playing when they leave the BoE. They may live their lives in abject fear of being found out.
      b. Some have some clues but are now so commited they fear that any change would expose their past mistakes so they are in a spider’s web.
      c. Some understand things pretty well ( Kristin Forbes for example) and yet still vote for the easing.

      The last group are the hardest to explain

      • “The last group are the hardest to explain”

        She/they are thinking about their pay check at month end and their RPI linked pension at career end..

      • I read “Where Money Comes From” and it implied the BoE’s own research staff know all about QE and its effects etc which imples they are ignored whilst senior highly paid clowns lie/pretend/flounce/gurn majestically.

  5. Is it just me or did the BBC report the growth figures in a rather gloomy way even though they were better than expected? It’s as if the apocalypse we were expecting after Brexit hasn’t happened but they can’t bring themselves to admit it!

    • I think that the BBC lost the plot on Brexit before the referendum. I saw a brilliant quotation about the BBC the other day, to the effect that it was obsessed with diversity (gender, colour, class etc etc), but completely denies diversity of opinion. It really cannot cope with non-Islington PC views.

    • Hi Jan

      I did contact Evan Davis (who follows me on Twitter) and Kamal Ahmed its economics editor on a factual issue concerning our national debt.

      “Over the past 5 months the UK debt to GDP ratio has fallen. Worth a mention don’t you think?”

      As far as I can tell they continued to say that the debt was rising without any qualification and sadly I did see instances claiming debt to GDP hadn’t fallen for decades either.

  6. Hi Shaun
    The 2008 crisis had at its core the over-reliance of computer models that no-one understood.
    Information and data is no substitute for knowledge and understanding. We are surrounded by a world obsessed with computer modelling output , that drives all sorts of stupid decisions, from CBs to AGW.
    GIGO is as true now as always.

    • 2008 crisis was fraud and bank traders + their bosses greed overruling any competent risk controllers and systems.

      Liars loans and mortgages – and when the banks sank in their own crap, they got bailed out when they should have been jailed for fraud and other financial crimes. Small wonder that mainstream politicians are held in contempt.

  7. I think you’re being a bit harsh on the BOE.

    BOE independence was in some ways a bad thing for them; it brought them down from their Olympian heights into the light and they are now shown to be just what your quotes say:averagely incompetent. What is irksome is their arrogance, insouciance and chutzpah in the face of all this incompetence, particularly in the light of your quote from Haldane which virtually admits that the the theoretical underpinning of much of their work is rubbish. You have to admire someone who can say that with, I assume, a straight face.

    There is also the point that the regime now of the BOE emphasizes forecasting and short term tinkering. Well, there is one thing about this that we know with 100% certainty: that a forecast will be wrong and a 75% probability that it will be quite wrong. But that is, arguably, the nature of the beast as Haldane has kindly pointed out.

    Does it make much difference at the end of the day? What you don’t see amongst all the froth of BOE antics is the effect of the underlying issues that now drive the economy: demographics, now kicking in with a vengeance; robotics, likely to make a huge difference within the next ten/fifteen years and the burgeoning welfare state generally, all of which impacts on that most important of all parameters: productivity.

    What actually need reforming is not so much the BOE as the whole business of banking and steering the economy away from the self destructive debt peonage model that we are now in and which can only end in crisis.

    As regards the looming onset of inflation they will, as you suggest, “look through” this unless(very important qualification) wages start to rise quickly (very unlikely). But if they respond they will make a bad situation worse; inflation will kick up living costs and IR increase will kick up mortgages and you precipitate a recession thus compounding all the problems. You can see why they refuse to see this. Being a saver I’d like them to put up IRs but I can understand why they would not

    • An excellent blog. I would just add that the central bankers are now seen as a quasi- technocratic government body, ie they have been accorded a saint-like status because they are “so independent”, but at the same time, they seem to be acting in tandem with governments. For example, Mario Draghi calling on governments to relax fiscal rules rather than letting QE take all the strain.

    • “…self destructive debt peonage model that we are now in…” the UK has been stuck in this model for at least 30 years, it hasn’t just arrived. There will be many more crises which they will muddle through as you should never underestimate the ability of the authorities to muddle along. They’ve been doing it for at least the last 30 odd years.

  8. From Carney’s point of view he could claim credit for cutting rates if the economy had stumbled after Brexit, claiming he had ameliorated any adverse effects, or he could claim credit for cutting rates if the economy didn’t stumble after Brexit claiming that his cut had avoided any adverse effects. The man can’t lose and that’s why he desreves every penny!

    • Hi DoubtingDick

      Yes he could have put “Every one’s a winner baby” from Hot Chocolate on his I-Pod. The catch for the latter scenario in which we now find ourselves is that it is much to quick, especially as the ECB has reported that it thinks the leads and lags and monetary policy have lengthened.

  9. I know I keep battering on about it but…
    If you believe that the Govt. & BoE are working towards their STATED objectives, then, yes, they look very incompetent; too incompetent imv.
    However, if they have the alternative agenda I’ve previously posited, support of the banks to the exclusion of all else, then, once again, Carney’s actions, and the MPC’s plans, make absolute sense.
    Lowering interest rates whilst inflation is expected to rise is perverse BUT…
    Banks have many loans to JAMS who, if that inflation is not matched by wages, may struggle to service their debt, leading to BIG trouble, if they are not helped.
    So what’s the answer? Lower the cost of their loans to the very minimum, so that they do not have to default.
    Once again, and there have been a number of instances, we can fit supposedly perverse economic actions to an alternative agenda.

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