Is the Bank of England really giving us Forward Guidance for an interest-rate rise again?

Yesterday saw a potential element of Groundhog Day or perhaps some truth in the words of the great Yogi Berra.

It’s deja vu all over again

Kristin Forbes of the Bank of England gave a speech in Leeds and the crucial sentence is below.

In my view, if the real economy remains solid and the pickup in the nominal data continues, this could soon suggest an increase in Bank Rate.

This of course reminds us of the period where the Bank of England gave us Forward Guidance when it hinted and sometimes strongly hinted at a Bank Rate rise. An example of this was provided by Governor Mark Carney at Mansion House in the summer of 2014.

The MPC’s current guidance makes clear that we will set monetary policy to meet the inflation target while using up that spare capacity. This has implications for the timing, pace and degree of Bank Rate increases. 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.

That last sentence sent markets into a frenzy as they adjusted to expectations of an interest-rate rise that year. Of course that was misguidance but that did not deter Governor Carney from hammering out the same old song in March 2015.

The Bank expects to return inflation to target within two years and to make limited and gradual increases in Bank Rate over the next three years in order to achieve that in a sustainable manner.

In January of last year he was hinting again albeit in a weaker manner perhaps affected by the accusations that he had been like an “unreliable boyfriend”

That means we’ll do the right thing at the right time on rates……….The journey to monetary policy normalisation is still young.

Actually the journey never started as of course last August the Bank of England folded like a deck chair and not only cut Bank Rate but embarked on more Quantitative Easing including that of Corporate Bonds.

Why does Kristin Forbes think this?

She claims that she expected a stronger economy.

I have consistently voiced concerns about whether the economy would prove stronger than in earlier MPC forecasts – largely due to a scepticism (based on the evidence discussed above) that heightened uncertainty would have as large a drag on growth as predicted in the short-term. But I also could not dismiss the arguments made for why the economy could slow by as much as in the best collective forecast.

Although as you may well have already noted this is classic on the one hand but on the other hand stuff. A bit like at the Inflation Report last week when Governor Carney informed us that interest-rates might go up or down! But in essence the case for an interest-rate rise is based on inflation trends.

On the other side, annual CPI inflation is expected to increase to 2.8% in the second quarter of 2018, and remain elevated so that it still averages 2.5% over 2019. This persistent overshoot of inflation above the 2% target, in and of itself, might provide a basis to tighten monetary policy

She goes further here.

More specifically, in my view, an overshoot of inflation to almost 3% was just tolerable when combined with a substantially larger deterioration in unemployment and demand than expected today.

There is of course a confession there that the Bank of England was wrong about the economic prospects for the UK post the EU leave vote or as some would put it scaremongering. Let us go back to the August 2016 Inflation Report.

The vote to leave the European Union is likely to affect GDP growth through a number of channels…… domestic demand growth is likely to slow over the near term as greater uncertainty and lower confidence drag on activity.

Of course it did not and here is the rub. These forecasting errors caused near panic at the Bank of England and we saw it adopt what it called a “Sledgehammer” of easing. What did our doubting warrior Kristin Forbes actually do?

All members of the Committee agreed that policy stimulus was warranted at this time, and that Bank Rate should be reduced to 0.25% and be supported by a TFS.

As you can see she voted for a Bank Rate cut and the bank subsidy called the Term Funding Scheme or TFS. She did vote against the Corporate Bond QE on her own and with 2 other voted against the extra Gilt purchases. How long did that last? Just over a month as the September 2016 Minutes tell us.

However, given the potential costs to the economy of immediately reversing the programme underway, they would not vote against the continuation of that programme for now. For Kristin Forbes, these arguments also applied to the corporate bond purchase programme.

Simply extraordinary! What was that about folding like a deck chair? It left the Bank of England looking like a bunch of Carney’s cronies at a time when there were genuine doubts. For example I pointed out on here and on the media such as BBC Radio 4’s Moneybox that a powerful stimulus had been applied to the economy from the lower UK Pound. Even worse Kristin herself had given speeches on the impact of changes in the value of the UK Pound on the UK economy.

The impact of exchange rate movements is even greater for the more open United Kingdom. Traded goods and services constitute over 60% of the UK economy. Currency movements directly affect the competitiveness of exports and import-competing domestic firms, and therefore production, employment, and profitability in both of these sectors. About 80% of sales by companies in the FTSE 100 are earned overseas.

So she was aware but did not have the courage of her convictions and beliefs.

Oh and this on forecasting records is woeful.

But I will show you that the Bank of England has actually done quite well

Anybody spot the catch which involves rewriting history?

What is most striking is how well forecasts for the six months after the vote have performed for most real variables – that is – forecasts made before the referendum based on a Remain vote.

Comment

I write this today with a tinge of sadness as I have praised the work and intelligence of Kristin Forbes in her time at the Bank of England. However since August she has behaved as if she has forgotten her principles and intellectual ability and if she was a man we would say she lacks cojones. What is the equivalent phrase for a woman?

Even worse the person who wants to give us forward guidance about an interest-rate rise in a speech acted rather differently only last week. From the Bank of England Minutes.

The Committee voted unanimously in favour of all three propositions.

In fact as there was an £11.6 billion Gilt maturity she voted for more QE which if you look at her claimed views is an even worse decision than her folding last September as we now know that the economy did not collapse in the meantime. Accordingly she is giving us forward guidance that looks like a house of cards built on shifting sands.

Even worse I expect this “stimulus” she has voted for to in fact have a contractionary effect on the UK economy. From the Bank of England Agents earlier today.

Indeed, the average pay settlement was expected to ease in 2017 to 2.2% from 2.7% in 2016

As the Bank of England “looks away now” and not only ignores rising inflation but with its policy easing gives it a push then real wages will fall. Thus the same mistake will be made that was made in 2011 where the so-called stimulus turned into a contraction as inflation rose in that instance to ~5%. That is the saddest part which is that a mistake is on its way to being repeated.

Oh and she credited William Phillips ( of the Phillips Curve) with a Nobel prize he never received presumably confusing him with the physicist of the same name. In a sign of low standards that has now been redacted with no acknowledgement.

Maersk

This has reported troubles today. From MSN news.

A.P. Moller-Maersk A/S halved its dividend Wednesday and reported a massive quarterly net loss as the dire conditions in the shipping industry took a further toll on its business, though it said it expects demand to regain strength this year…….The company’s net loss for the quarter ended Dec. 31 was $2.68 billion, compared with a loss of $2.51 billion a year earlier. Revenue fell 2.6% to $8.89 billion

Why is this a Bank of England issue? Well it has bought the corporate bonds of Maersk ignoring this issue.

The Danish shipping-and-oil conglomerate’s

Imagine having to explain to the UK taxpayer that you have lost their money supporting a Danish company in a policy you enacted after they had voted to break away from some European involvement?