Does anybody believe the Bank of England hints of an interest-rate rise?

Firstly let me open with my best wishes to those caught up in the terrible event at Westminster yesterday which is somewhere I pass through regularly. Let us then review some better economic news in a period where the UK statisticians overload particular days. If we go back to Tuesday where there was a panoply of inflation data there was also this about the public finances.

Public sector net borrowing (excluding public sector banks) decreased by £2.8 billion to £1.8 billion in February 2017, compared with February 2016; this is the lowest February borrowing since 2007.

I recall that the January numbers were also more positive and this led to this.

In January and February 2017, the government received £13.4 billion and £4.7 billion respectively in self-assessed Income Tax, giving a combined total of £18.1 billion. These represent the highest combined self-assessed Income Tax receipts on record (records begin in 1998).

So good news and other forms of revenue were good too.

Similarly, in January and February 2017, the government received £6.2 billion and £2.2 billion respectively in Capital Gains Tax, giving a combined total of £8.4 billion. These represent the highest combined Capital Gains Tax receipts on record (records begin in 1998).

It would seem that Capital Gains Tax is more significant than might be assumed. I guess the higher house prices ( it is paid on second homes and therefore buy to lets) and maybe profits from the equity market are driving this. I am surprised that the Bank of England has not been trumpeting this as part of its wealth effects, have they missed it?

Also the overall tax situation for the financial year so far has been strong.

In the current financial year-to-date, central government received £616.1 billion in income; including £465.6 billion in taxes. This was around 6% more than in the previous financial year-to-date.

There was a change to National Insurance rates but even allowing for that we are seeing a pretty good performance and ironically after the talk of extra spending and fiscal expansionism the numbers may well be telling a different story.

Over the same period, central government spent £638.1 billion; around 2% more than in the previous financial year-to-date.

With inflation rising that is of course less in real terms than it first appears and meant that we did better here.

Public sector net borrowing (excluding public sector banks) decreased by £19.9 billion to £47.8 billion in the current financial year-to-date (April 2016 to February 2017), compared with the same period in the previous financial year;

Retail Sales

There was good news as well in the February data for Retail Sales.

Estimates of the quantity bought in retail sales increased by 3.7% compared with February 2016 and increased by 1.4% compared with January 2017; this monthly growth is seen across all store types.

However the monthly numbers are erratic and the seasonal adjustment is unconvincing. February was partly so good because January was revised even lower. But the year on year comparison was strong.

In February 2017 compared with February 2016, all main retail sectors, except petrol stations saw an increase in the quantity bought (volume) while all sectors saw an increase in the amount spent (value). The largest contribution in both the quantity bought and amount spent came from non-store retailing.

However because of the week December and January data the trend remains for a fading of the year on year growth.

The underlying pattern as suggested by the 3 month on 3 month movement decreased by 1.4% for the second month in a row; the largest decrease since March 2010 and only the second fall since December 2013.

Actually we get a confirmation of some of the themes of this blog. For a start in something which central bankers and inflationistas will overlook higher inflation leads to lower consumption. The higher oil price has led to less petrol consumption.

the largest contribution came from petrol stations, where year-on-year average prices rose by 18.7%……..The underlying trend suggests that rising petrol prices in particular have had a negative effect on the overall quantity of goods bought over the last three months.

Over time I expect this to feed into retail sales as you see that prices are rising overall as the higher oil price feeds through.

Average store prices (including fuel) increased by 2.8% on the year, the largest growth since March 2012;

So sadly I expect the retail sales growth to fade away as higher inflation erodes real wages.  Also whilst it is only one sector we have yet another inflation measure (2.8% here) running higher than the official one, how many do we need?

Royal Statistical Society

I am pleased that it has expressed its misgivings about the new UK inflation infrastructure in a letter to The Times today. Here are the main points.

For several years, the Royal Statistical Society (RSS) has been advocating the introduction of a proper household inflation index. We believe the answer lies in the proposed Household Costs Index (HCI) that is currently being developed by the Office for National Statistics, with expert input from some RSS members.
Paul Johnson is right that government should not be cynical in its use of different inflation measures. We would also argue, however, that the government should use the appropriate inflation index for the job at hand. CPIH makes sense as an index for economic policy matters (such as potentially interest rate setting by the Bank of England) but it is HCI that, once fully developed and proven, should be used for uprating purposes and for assessing real incomes in the UK.

Good for them! I have spent quite some time taking my arguments to the RSS and am pleased that the message is at least partly not only being received but also transmitted. My only quibble would be that CPIH results from national accounts methodology and not economic principles.

Ben Broadbent

Ben spoke at Imperial College earlier and as ever his Forward Guidance radar misfired.

We may already be seeing the impact of that squeeze on retail spending, which in real terms fell quite sharply around the turn of the year.

Some felt it was a hint for the 9:30 numbers but if it was Ben had misread them. He gives some more Forward Guidance by telling us the UK Pound £ may go up or down!

Either the currency market is too pessimistic, in which case sterling’s depreciation is likely to be reversed over time. Or it’s not, in which case the costs of exporting will eventually go up.

Actually after the last Forward Guidance debacle Ben has either completely lost the plot or has developed a sense of humour as whilst not in the speech this was being widely reported..

It’s quite possible we could see rates go up in the UK

Can see scenarios where BOE could raise rates ( h/t FXStreet )

Another issue is that Ben Broadbent seems to follow financial markets and assume they are correct. If you recall when I was on BBC Radio 4’s MoneyBox last September the ex-Bank of England economist Tony Yates repeated the same mantra. They seem to have forgotten that they should not be puppets they should have their own views.


This week has had a ying and yang to it on UK economic news. The public finance and retail sales numbers remain good but the Sword of Damocles already beginning to swing is higher inflation especially via its effect on real wages. This will affect retail sales as 2017 progresses and that will affect the public finances too albeit there are also gains for the latter. Yet the establishment continues with its objective of inflation measures that ignore as much inflation as possible. Does anybody actually believe this new Forward Guidance from the Bank of England? After all back in 2011 they ignored inflation which went above 5% with disastrous consequences for real wages.

Me on Official Tip-TV



28 thoughts on “Does anybody believe the Bank of England hints of an interest-rate rise?

  1. Hello Shaun,

    I’ve often opined that the BoE is not looking at CPI/RPI inflation when its says its looking at “inflation” , it means wage inflation only

    As wage inflation is no where to be seen in the general public ( top 0.1% dont count you see ) then they see no reason to raise rates

    that and the fact as pointed out by other posters , that a raise in rates will most likely collapse the property market and hurt the Banks ( that is hurt anyone else is just collateral damage) .

    The Banks own the Government , and therefore us


    • My day rate is down 20% from 5 years ago when working overseas and down 10% in the UK, as i’m undercut by trained up EE’s, Indians, Filipinos etc..

      Being as its an unspoken race to the bottom i can’t see how wages will rise significantly …. unless of course Trump introduces tariffs and the American economy and wages boom then we’ll follow.(highly unlikely he’ll bring in tariffs imho)

      But i don’t think anyone believes what the BoE say, they’ve proven themselves to be incompetent, corrupt economy destroyers who serve the banks and indebted only. They’re trying to go Japanese but with huge twin deficits.

      FFS private debt is up 12% in a year and they do nothing to calm this down .. well apart from lower interest rates, print more money and come up with TFS to steal from savers to give to borrowers.

      Yet Theresa May, Blairite Hammond and the group of MPs playing along with “Carney and the Free Thinkers” at the TSC do nothing.

      • Ah, but if we follow the examples of IBM and Capita and export all the jobs then we’ll have solved the immigration “problem”.

      • you are what you do, not what you say you will do. In Trump’s case this means he buys cheap Chinese steel and employs cheap immigrant labor. Not to mention cutting the life out of health care to give himself a massive tax cut.

        Don’t hold your breath for a US led wave of protectionist wage rises

  2. How things have changed. What your figures show above seems to me is:
    1. For once, a government is trying to cut the deficit and is at least moving in the right direction on that;
    2.The BoE, which used to pretend to be apolitical and the guardian of “sensible policies”, has created a massive false market in house prices and equities through QE forcing interest rates down, seemingly to stop the banks going bust. I think that the old idea that the BoE raises interest rates to choke off inflation is just that, ie an old idea and no more.
    We appear to be no nearer a “normalisation” of policies than five years ago. I do find it ironic, however, that the government is at least trying to be fiscally responsible, while the BoE has simply thrown every rule out of the window to keep the banks going.

    • Hi James

      As I look around the world that is mostly what we see with central banks having massive balance sheets and low interest-rates. Even the US Federal Reserve is only at 0.75% -1%. So monetary policy has been deployed whilst fiscal deficits have mostly been reduced although usually more slowly than promised. Japan is something of an outlier on almost all fronts and today’s Yen rally through 111 versus the US Dollar was another example Yne strength looks wrong but like The Terminator it keeps coming back.

      As to the UK we have had the reverse of what was hinted at with the new government last autumn. I remember writing about the claimed fiscal expansionism but that has not happened so far.

      • This is disingenuous Shaun. The Govt talked of fiscal expansion last year and probably based their increases on projected GDP growth and tax take in order to try to make the fiscal increase prudent.

        You are now blaming the Govt because the unexpected increased tax take has reduced the fiscal expansion in percentage terms if not in monetary terms.

        For one who criticises the Establishment so much (which I agree with) you are in danger of sounding like them as you twist and turn re-interpreting stats for your own ends and making no allowances for their erroneous projections.

        People, glass houses and throwing stones.

        Please keep it objective as I appreciate your hitherto evidence based objectivity.

        • Hi Jive Bunny
          You have misunderstood me or perhaps I did not make myself clear. My point was that we got hints of a fiscal expansion last autumn. However if we look at the rise in inflation then the rise in spending over the past year is in fact low and different to what was implied back then.

      • “However if we look at the rise in inflation then the rise in spending over the past year is in fact low and different to what was implied back then.”

        That’s another way of saying “the unexpected increased tax take has reduced the fiscal expansion in percentage terms if not in monetary terms ” because what
        I wasn’t spelling out is that increased inflation automatically equals increased tax take so my original statement applies – the Govt under estimated inflation/tax take when calculating extra fiscal expenditure and you are criticising them for the under estimation which, given their track record for miscalculation is only to be expected although they usually err on the side of unbounded optimism but nevertheless it remains the case that you are making an unfair criticism of Govt fiscal expansion as you cannot expect anyone’s crystal ball to be completely accurate when projecting future growth/inflation/tax take etc.

  3. Great blog as always, Shaun. Regarding the RSS letter to the Times, it is great that they have come out in favour of the Household Costs Index (presumably the new name for the Household Inflation Index) for upratings, but tremendously disheartening that they would believe the CPIH has any merit as the target inflation indicator of the Bank of England. It is also dangerous, as there has so far been no change in the remit of the Bank of England to move to CPIH, but this kind of a letter would certainly encourage a move in that direction.
    The CPIH is an illogical mess. It was a no-brainer that the only owner-occupied housing (OOH) component you could add to an HICP like the UK CPI that made sense would be one based on the net acquisitions approach. Instead the CPAC decided to add an OOH series based on rental equivalence to be consistent with the household final consumption expenditure (HFCE) deflator. Now there is a revised CPIH including council tax even though the HFCE deflator excludes it because consistency with the HFCE deflator is unimportant. You couldn’t make this stuff up and have anyone believe you.
    The best monthly measure of the inflation rate for central bank purposes the ONS now calculates is probably the RPI ex mortgage interest and council tax adjusted for the formula effect, which fortunately is still calculable even after the cuts that the ONS has made to their published RPI series. Its annual inflation rate was 2.7% in February 2017, as opposed to 2.3% for the CPIH. Since there are also problems with this RPI series, like the omission of stamp duty, it is reasonable to assume that the CPIH inflation rate is at least half a percentage point lower than what an ideal target inflation indicator for the Bank of England should be showing.
    On Tuesday, the 2016Q4 update of the experimental OOH series were published along with the revised CPIH estimates. It showed an annual inflation rate of 2.0% for 2016Q4, down from 2.1% in 2016Q3. This contrasts with a 2.7% inflation rate for the OOH component of the CPIH, up from 2.4% in the previous quarter. Considering how quickly house prices were moving up at this time, this doesn’t seem to make sense at all. There really should be a re-examination of this series and how it is calculated. In principle, it is the best way to calculate an OOH series for a Bank of England target inflation indicator, but the calculated series seems to be showing way too little inflation.

    • Hi Andrew and thank you

      One thing that the proposed HII (Household Inflation Index) has not lacked is new titles. It was only last autumn I was sitting at the discussion seminar with the ONS representatives calling it an Index of Household Payments. If only they put the same effort into producing it monthly rather than the appalling effort to neuter it via producing it much less often.

      I see you have produced a sort of RPIJ (X) which if produced would I think get a fair bit of support. I remember Dr Mark Courtney saying that the truth was perhaps half way between CPI and RPI but the establishment have shown no similar willingness to compromise.

      As to the net acquisitions method it has been neutered somehow and I need to sit down and figure out how. First place I would start would be with the weighting.

  4. The ostensible rationale for not acting is that the inflation is of the “cost push” rather than “demand pull”. If there were sustained second round effects on wages then they would have to react at some point but, as such second round effects would take some time to become established, it would I think only be acknowledged after Carney leaves the BOE in 2019.

    To be fair the erosion in real wages will dampen activity down on its own account as you would acknowledge and this acts as a proxy rise in interest rates. Why make things worse by putting up interest rates when the inflationary impulse will probably work its way out of the system – as it did in 2011?

    Of course I suspect the real reason is that there’s too much debt around and rises, even quite small ones would bring the whole house of cards crashing down. Frankly even if there were strong second round effects almost immediately I still think they would be reluctant to raise rates because of this point.

    As I said yesterday policy is dead in the water and the days when you would listen to the BOE and hope to get any sense have long since gone.

    • Hi Bob J

      I agree except that one can use interest-rates to influence the exchange-rate and thereby help with the cost push inflation some of which is due to the UK Pound £’s fall. This was made worse by the monetary policy easing last August which was a clear mistake for that reason in my opinion.

  5. Thanks for a good read
    The question for me does the Bank of England believe it’s roll is to support asset prices rather than control inflation?

    If it is to ensure asset prices remain high. Inflation measures are not important to it.
    (It’s cheap money policies seam to indicate asset prices are important. Are they important enough that if house price soften more the next move in rates will be down?)

    Perhaps it’s time for the Bank to be Honest and admit inflation target is at best a secondary concern.

    • nobody know what the BoE really believes , including themselves…..

      “If it is to ensure asset prices remain high. Inflation measures are not important ”

      If you what what they do , and not what they say , thats the impression I get

      all to save the Precious !


  6. Hi Shaun, interesting post. In response to the question in the title: er, no, at least not to a meaningful degree within the next few years. I suppose they could reverse the token 0.25% fall at some point, if they wanted to give a stronger message that they are prepared to act?

    • I think that you will find that this 0.25% cut saved the economy from immediate Armageddon and at least 500,000 jobs, so it may be a little tricky to reverse just yet!

  7. Great post again today Shaun.
    The day of reckoning has only been postponed,sadly the population has been educated that debt is good,to paraphrase Gordon Gecco.
    However regardless of whether you are a household,business,or Government all have a credit limit,the crash in house prices and the economy is inevitable.
    As a nation we are highly leveraged house prices are only at the level they are because of money created as debt by the morally bankrupt Banking industry.
    If inflation continues to rise and I acknowledge other correspondents points about stagnant wage increases,then the BoE would be like King Canute,interest rates would have to go up.
    Your points about US and German inflation are interesting I only see negatives for Western economies.

    • Hi Private Fraser and and thanks

      If the only way is up for debt then the trend for interest-rates has to remain down. On that front I had a wry smile at this in City-AM.

      “The UK is the fourth most prepared country in the world to ditch physical cash and go digital.

      The annual research from Citi and Imperial College London found the world continues a steady march towards towards digital money, but, even in the most ready countries such as the UK, the unbanked and underbanked are still being left behind.”

      It also made me wonder what underbanked is?

  8. It seems likely to me that the BoE will be forced to hike into a currency crisis because their pensions/salaries are paid in sterling.

    They’ll only hike in their own interests.

  9. Hi Shaun,
    Ben Broadbent talks like a poor weather forecaster. Someone who does not have a clue about the future over which he has absolutely no control.
    It’s all reactive not proactive.
    Have they lost all confidence in their models and fan charts?
    Did the credit crunch really push the BoE into uncharted territory – an alternative universe where all monetary policy skill and knowledge is useless?
    Is ZIRP & QE a sprung trap?
    Does the MPC resemble a group of people in a dark room who have given up fumbling for the door handle and who are now fumbling for the light switch?
    Is too big to fail really too big to fix?

    • Hi Eric

      They have ignored the things from the past which do work ( the rule of thumb I quote from for exchange rate impact) and clung to things which have not worked such as the output gap. So they are either not very bright or unwilling to learn or some combination of the two.

      Now they are trapped in a spider’s web of their past deeds.

  10. Hi Shaun, somewhat of a leading question today. Of course the BoE will not voluntarily raise interest rates. Private Fraser suggests 0.25% which is meaningless given how close we are to zero so I guess that would be possible but even that could spook the credit addicts in our economy.
    I reckon Carney would “look through” even 5% of consumer inflation before even considering an elective rate rise.

    The more interesting areas are things getting out of control in debt markets, where a risk premia is forced up the Govt’s debt, or a currency crisis where we need to encourage people to hold sterling, or perhaps oddities in M3/M4 which we saw last Autumn that signal out of control financials.

    So no, there will not be voluntary IR rises, something to ponder is given the 10 years of Central bank fix-up it is possible that there we don’t have experienced governors with control levers who can actually execute policy change in the face of a perceived “out of control” situation. What I mean is that they under or over-react to symptoms they haven’t seen in their recent remit. Take Carney’s mistaken IR drop last summer. If they see some weird stuff, will they find the button or push it too hard by mistake?

    Paul C.

  11. Hi Shaun, just watched your TV. That was punchy, I think you’ll get a reputation for flaming interview, especially those social commentary throwaways. Excellent, keep it up.

    • Hi Paul and thank you

      As to Carney in your previous comment he responded to the EU leave vote well initially but then was unable to escape his own preconceptions which trapped him in the August monetary easing error. That is not a good sign for a real crisis where he may look calm but will continue to make mistakes.

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