Yesterday was a rather extraordinary day at the Bank of England even by its standards. I do not mean in terms of the policy announcements as they were not only unchanged but were always likely to be that way. This is of course because it boxed itself in with its pronouncements of economic doom last summer leading to its Bank Rate cut and extra QE (Quantitative Easing). There was actually a technical announcement on the QE front about another Operation Twist style move.
the Committee agreed to re-invest the £11.6 billion of cash flows associated with the redemption of the January 2017 gilt held by the Asset Purchase Facility
If you think about an economy which the Bank of England now thinks will have 2% economic growth in 2017 and inflation heading above target soon that is simply completely inappropriate and wrong. It is a consequence of its silly “Sledgehammer” rhetoric which Mark Carney plainly feels is too embarrassing to reverse now.
Economic growth forecasts
The Bank of England and Mark Carney seem to be getting worse and worse at this. From yesterday’s MPC (Monetary Policy Committee) Minutes.
The preliminary estimate of GDP growth for 2016 Q4 had been 0.6%, the same rate of growth as had been registered in the previous two quarters, and 0.2 percentage points higher than expected at the time of the November 2016 Inflation Report. This, together with improvements in business survey output and expectations indicators, had led Bank staff to raise their GDP growth nowcast for 2017 Q1 to 0.5%, also 0.2 percentage points higher than in November.
Such things matter when the Forward Guidance had led to policy changes as we saw in August. In fact the situation is ever more woeful than that. Even the Financial Times which of course has lauded Mark Carney as a “rockstar” central banker could not avoid pointing out this reality.
The Bank of England upgraded UK growth forecasts significantly for the second time in six months on Thursday in the latest indication the central bank’s once-dire outlook for the economy after June’s Brexit vote has been proven overly pessimistic.
The bank said it now predicts gross domestic product will grow 2 per cent this year, the same as last year and up from 1.4 per cent forecast in November. Shortly after the referendum, the BoE predicted the economy would expand just 0.8 per cent.
The simple fact is that the UK consumer and if you look into the detail our female consumers behaved like they have in the past and carried on regardless. It is for the Bank of England to explain why it ignored UK economic history. Perhaps the way it is now packed with people I have described as Carney’s cronies?
Was this predictable?
Yes it was as I pointed out back then. From August 3rd last year on the day of ignominy for the Bank of England.
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.
I repeated this view on BBC Radio Four’s Moneybox on the 17th of September when I debated with ex Bank of England staffer Professor Tony Yates who said “they did pretty much the right thing”. However it was kind yesterday of Mark Carney to confirm that I was indeed right all along.
Third, financial conditions in the UK remain supportive, underpinned by low risk-free rates, the 18% fall in sterling since its November 2015 peak, and lower credit spreads.
Mark Carney tries to take the credit for this
Perhaps the worst part of yesterday’s Inflation Report was the bit where Mark Carney tried to take the credit for the performance of the UK economy.
In part this reflects Bank of England policy actions, which have also helped lower the impact of uncertainty on activity.
He omitted to point out his own doom laden pronouncements which would hardly have helped uncertainty and he had another go at that yesterday.
This stronger projection doesn’t mean the referendum is without consequence………More broadly, the level of GDP is still expected to be 1½% lower in two years’ time than projected in May, despite the substantial easing of monetary, macroprudential and fiscal policies.
If we return to Governor Carney’s claims we see that we had a “bazooka” from a lower pound compared to a “pea shooter” from his Bank Rate cut as I pointed out on Moneybox. Indeed the Governor got himself into something of a mess at the press conference as he tried to take some of the credit for consumer resilience (debt fuelled growth) and then denied that there was much debt fuelled growth! So let us leave him in his own land of confusion.
Ivory Tower alert
We got some of this too as the woeful Bank of England forecasting effort saw this addition.
Specifically, the MPC now judges that the rate of unemployment the economy can achieve while being consistent with sustainable rates of wage growth to be around 4½%, down from around 5% previously.
This was such a hot potato that the subject was handed over to Deputy Governor Ben Broadbent to explain. Ben was obviously uncomfortable as he began speaking behind his hand in the manner of Jose Mourinho. He then tried to tell us he had been right all along which of course begged the question of why there was a change? Anyway we then did get a brief burst of honesty.
Forecasting is a hazardous business
It is for Ben!
Oh and remember when their Forward Guidance was that 7% unemployment was a significant level? Whatever happened to that….
Another problem is brewing here and this is in addition to the fact that it is going “higher and higher”. This from the Bank of England yesterday was simply wrong.
Beyond that, inflation is expected to increase further, peaking around 2.8% at the start of 2018, before falling gradually back to 2.4% in three years’ time.
As I have written many times on here that is too low as I expect it to rise above 3% due to the impact of the lower UK Pound £ and the higher price of crude oil. I recall Kristin Forbes of the Bank of England saying that she thought inflation would be pushed some 1.75% higher but now she seems to have done something of a U-Turn and decided it will be more like 0.75%. As the UK Pound £ has fallen further in the meantime that is quite a big change.
There is one aspect of Bank of England Forward Guidance which has in fact proved correct.
the appropriate level of Bank Rate is likely to be materially below the 5% level set on average by the Committee prior to the financial crisis.
I think we can say 0.25% is materially below 5%. But the rest of it has proven to be woeful. After all Mark Carney’s hints of a Bank Rate rise would fit an economy over 3 years into a growth phase and with inflation set to run above target. But of course all his hints and teases were followed by exactly the reverse or a Bank Rate cut.
As to the inflation forecast well this morning has brought the beginnings of a further critique of that as well. From the BBC.
Npower has announced one of the largest single price rises implemented by a “Big Six” supplier. The company will raise standard tariff electricity prices by 15% from 16 March, and gas prices by 4.8%. A typical dual fuel annual energy bill will rise by an average of 9.8%, or £109.
Also there is the media inspired great lettuce and broccoli crisis of 2017.
Some supermarkets are rationing the amount of iceberg lettuce and broccoli customers can buy – blaming poor growing conditions in southern Europe for a shortage in UK stores.
Tesco is limiting shoppers to three iceberg lettuces, as bad weather in Spain caused “availability issues”.
Morrisons has a limit of two icebergs to stop “bulk buying”, and is limiting broccoli to three heads per visit.
Asda said courgette stocks were still low after a UK shortage last month.
I guess we can expect higher prices here too as we mull whether the weather has ever affected food availability in the past! As a public service announcement there did not appear to be any shortage at Lidl at Clapham Junction yesterday. What will the Bank of England do about rising inflation? Well as you can see it takes a while to say “nothing”
At its February meeting, the MPC unanimously judged that it remained appropriate to seek to return inflation to the target over a somewhat longer period than usual, and that the current stance of monetary policy remained appropriate to balance the demands of the Committee’s remit.
If you are trading the US non-farm payroll numbers today then good luck….