Gloomy Gertjan of the Bank of England could easily vote for another Bank Rate cut

Yesterday gave us another opportunity to discover what a Bank of England policy maker is thinking. This was because former hedge fund manager Gertjan Vlieghe gave a speech at the headquarters of Bloomberg in London in . Sadly Gertjan is yet another policy member of the Bank of England who has had trouble with his ethical radar. From the Guardian in July 2015.

“Despite the fact that there would be no conflict of interest between my future role and any continued passive stake in Brevan Howard, we have now come to an agreement whereby I shall be bought out of my remaining interest in the partnership before taking up my position on the MPC. As of 31 August I will have severed all financial and other ties with Brevan Howard. I have taken this step to avoid any mistaken impression of a conflict of interest,” said Vlieghe.

If Gertjan had wanted to avoid the impression that he was focused on the City of London perhaps Bloomberg was not the best place to give his speech.

What did he say?

Forecasting problems

Gertjan is obviously troubled by the fact that the Bank of England got the post EU leave vote economic forecasts wrong.

I will argue that there is an important distinction to be drawn between good monetary policy and making accurate forecasts………..And there have been times, just recently, when forecast errors were small and policy was broadly right.

Ah so he was right by being wrong apparently! If we go back to August we were told this by the Bank of England in the monetary policy minutes.

the outlook for growth in the short to medium term has weakened markedly.

Now the medium term has yet to happen but in the short-term the error was not small as the UK economy mimicked the film “Carry on Regardless” . If you had looked at economic growth without knowing about the referendum vote you would have seen 2016 as a pretty constant year.

Staying with the forecasting problem Gertjan is keen to put in our minds the view that it does not matter.

But the existence of forecast errors per se, whether large or small, is not necessarily a sign of either wrong policy or of using the wrong framework

Also in an increasingly desperate effort he tries to claim that it was unpredictable.

Sometimes forecast errors simply tell you things happened that could not have been foreseen.

All you have to do is look back to last summer on this website when I pointed out the powerful effect of the then lower UK Pound £. Either Gertjan is not aware of that or he chose to ignore it.

Also if we step back for a moment Gertjan also offers a critique of his own policy because this below is one of his own central planning policies.

We only have an imperfect notion of how the economy works, we only have partial information about the state of the economy at any point in time, and the economy is constantly hit by unanticipated shocks.

Yet he charged in with policy easing on August 4th 2016 anyway. Apparently as he splashed around in his speech this policy easing was the equivalent of this from a doctor.

a doctor can perform life-saving procedures, such as administering blood-thinning medication, widening the coronary artery, or performing a coronary artery bypass.

What about policy then?

This is where the forecast errors came in as Gertjan explains his thinking back then.

First and foremost, short-term indicators of the economy, such as business surveys, consumer confidence, housing indicators, had turned down sharply. We always monitor published data that, historically, has given a decent but not perfect signal of where the economy is heading in the near term . And these data were falling rapidly in the immediate aftermath of the referendum. For example, the Composite PMI, an indicator of business activity growth, had fallen to its lowest level since 2009.

He then makes another step.

actual published data on economic activity  and uncertainty

You see if you look at what he was using yes they were published but in the main they were sentiment indicators rather than actual numbers. Acting on sentiment is of course a feature of a hedge fund manager but a central banker faces many other issues.

If we add into this that Gertjan seems a naturally gloomy chap then an easing was on the cards.

I already saw considerable weakness in nominal growth as we headed into the referendum, and I was starting to think the economy might need more stimulus even in the status quo scenario of a remain vote.


We have gone from expecting a short and sharp slowing, to pencilling a much milder and more protracted slowing.

Indeed he is so troubled by accusations that he is gloomy he feels the need to deny it.

My main point regarding our August forecast is that we were not possessed by some innate feeling of gloom,

This gloom led Gertjan to being completely wrong.

we put in place a stimulus package in August, of a 25bp Bank Rate cut, a funding scheme to make sure the rate cut was passed on, additional gilt purchases, and corporate bond purchases……. I thought our August package would be the start, and further stimulus would be needed.

Not only was that completely wrong the Forward Guidance ( to the November meeting) was wrong as well.

We get four explanations of why he was wrong and none of them mention the impact of the UK Pound £ so having given him the benefit of the doubt at the beginning I do not do so now. This is rather poor. Also his claim of a “fiscal reset” is contradicted by the UK fiscal statistics as I have reported on here.

Future policy

Oddly the lower exchange rate now does get a mention! Accordingly we will get higher inflation and there is also a mention which if you blink you will miss of an economic boost too. But of course gloomy Gertjan has a couple of other things to worry about. The first is wage growth.

 Let’s be clear, wage growth has picked up somewhat from the sub-1% pace in 2013 and 2014, but not nearly as much as we had expected, given the fall in the unemployment rate


Ah another forecasting error. Anyway this will lead to a consumer slow down.

The consumer slowdown, which initially did not materialise, now appears to be underway…….. I think the slowdown is more likely to intensify than fade away.

Added to this I note that the inflation will be in Gertjan’s words.

Inflation is set to rise, but that seems entirely accounted for by exchange rate pass-through, which, although persistent, will ultimately fade as long as inflation expectations remain well anchored.

Of course we all ultimately fade along the lines of the famous statement by JM Keynes “In the long run we are all dead” but I have no idea how that helps in the intervening period.


Gloomy Gertjan seems to be in denial here. He placed his faith in the wrong factors last August and made a mistake based on unsurprisingly for him a gloomy forecast. Is it not intriguing to wonder why a financial sector insider ( ex-hedge fund manager) is so gloomy? Of course we can add to that the issue of why the Bank of England needed another representative of the financial sector onboard?

Sooner or later he will be right as of course economic slow downs eventually arrive a like a watch that has stopped gloomy Gertjan will then claim he was right all along. But in his speech was a single sentence which explains in my opinion where he has gone wrong.

Until mid-2016, inflation was close to zero, courtesy of the earlier drop in oil prices and the strength of sterling. That meant that real household labour income growth was close to 3%, despite subdued nominal wage growth.

Lower inflation led to an economic boost via stronger real wage growth so in my opinion the objective is to keep inflation low, as wage growth seems set to be subdued. However whilst claiming he has provided an economic boost the expectation and then arrival of the Bank of England easing last August pushed the Pound £ lower and inflation higher. Thus via the real wage effect the likelihood is that gloomy Gertjan has created his own future gloom by repeating the errors made in 2010/11. If he continues on that road he will probably cut Bank Rate again in spite of his talk of a rise.

Also if we continue his rather bizarre medical analogy the side-effects are growing.

Consumer credit growth has been accelerating over the past few years, and has accelerated further in the second half of last year, suggesting that the resilience of household spending was in part financed by credit,

Chocolate bars

We have been through a phase where prices have risen and chocolate bars have suffered from shrinkflation due to higher costs and a lower £ .Well there is this.

Cocoa futures in London have slumped by about a third since reaching a six-year high in July. ( Bloomberg).

Any chance of an extra Toblerone triangle?

Me on TipTV Finance






21 thoughts on “Gloomy Gertjan of the Bank of England could easily vote for another Bank Rate cut

  1. Shaun,

    Austerity measures from Gideon still kicking in plus Universal Credit hiccups as well as increased pension contributions plus rises in insurance premium tax later on. All will reduce disposal incomes.
    So spreadsheet Phil will have his work cut this autumn as he attempts to raise funds but unable to increase income taxes or NI. He will need even more VAT + stamp duty revenues. Spend to the end!

    • Hi Chris

      What taxes can be raised these days? We did raise Stamp Duty and get dome extra billions out of it but the National Insurance handbrake turn does question as to what can now be done with taxes on income. Another version of Turning Japanese? Look at what happened there with the rise in their version of VAT called the Consumption Tax.

  2. Re Gideon’s delayed tax bombshells, I see that there’s now a 25% exit tax for people wishing to move their pension savings out of the UK. Luckily, I moved my personal pension into a QROPS 4 years ago and thereby saved over £250,000 in tax.

  3. Shaun, let me get this straight. You seem to be surprised that a hedge fund manager:
    1. Has no idea of conflict of interest;
    2. Has no sense of his own mistakes;
    3. Assumes he knows everything and is right all the time.
    I would have thought that this fits the phenotype perfectly.
    On the other hand, why he is seen to be suitable partly to be in control of our destiny seems to be a complete mystery to me.

      • Of course, you are right. I still find it incredible that Hector Sants, to name but one, retired with a knighthood and millions and millions. For what exactly? Missing the banking crash? pushing bits of paper round the City?
        Beats me.

  4. I think you completely underestimate the need of these people to appear infallible. How many times have you ever heard a person in any position of authority in any of our major institutions utter those three little words: “We were wrong”? I suggest the you could count the number of instances on the fingers of one very badly mutilated hand.

    If people like Vlieghe, or the institution, admit to error then that questions their authority and that of the institution they are attached to in which case why should we give them that authority? That is the danger as they might see it. The comedy of Yes Minister which you often quote on here is, as you are perfectly aware, very near the knuckle and largely quite an accurate representation of how affairs are conducted.

    Let’s face it the musings of the Vlieghe’s of the World are not addressed to you who knows perfectly well that the emperor has no clothes but to a compliant media and a largely ignorant population. Most times they get away with it.

  5. Shaun, he has completely failed to realise that, with inflation rising, we have already had an interest rate cut in real terms. So what exactly is he asking for?

  6. Great blog and TV interview, Shaun.
    Nice to see that when you speak, eastern European central bankers listen. The Czech National Bank just announced today that it would be removing the koruna’s peg to the euro:
    There is a very bright economics professor at Carleton University in Ottawa, Radovan Vadovič. He told me that when the successor states to Czechoslovakia entered the EU they were both committed to entering the euro and it was mainly causality that led to Slovakia adopting the euro at the beginning of 2009, while the Czech Republic stayed out. Since then, he thought, both countries have tended to look for evidence that confirms the correctness of their getting in and staying out. I notice that in its questions and answers on breaking the peg, the CNB says: “We envisage the floating exchange rate regime being applied until the Czech Republic joins the euro area, i.e. until ERM II. Euro adoption is a political decision and cannot be expected in the foreseeable future. ERM II entry was therefore never considered as an option for exiting the exchange rate commitment.”

    • Hi Andrew and thanks

      Personally I think the Czech Republic got the better deal. As to today’s event it did raise a smile but so far has been relatively mild as the Koruna has rallied about 1.5% versus the Euro. I suspect the CNB has been intervening and of course we are not yet even out of day one.

  7. The answer to every problem at the Bank of England is always more inflation, lower rates or both. They keep harping on about their concern over wage growth, but it is workers never ending struggle to maintain their purchasing power against the inflation caused by the BofE’s inflationary policies which is seen as the problem that has to be dealt with!!!

    Alice and Wonderland doesn’t even begin to describe the insanity of it all.I am still amazed that sterling has held on to $1.15 floor from the far east collapse in October, how can forex traders not see the Bank of England will never raise rates?, the pause in the drop is now nearly six months old,just how long can it carry on?

    • seems then we don’t need Mark then

      just a coin with “more inflation” written on one side and “lower interest rates” on the other…….


    • “Who in the world am I? Ah, THAT’S the great puzzle!”
      Alice’s Adventures in Wonderland; Chapter 2; The Pool of Tears

    • If people were spending less on rent/mortgages they’d have more to put into the economy thus encouraging inflation.

      But they will do everything to avoid free markets.

  8. We live in a democracy that doesn’t work for the population,we are bombarded by fake news and misleading information.Prime example the Media reports on David Moyes banter with Vicki Sparkes was that he threatened to slap her,yes those were his words but it is about context they were both laughing.
    Some may think this is off topic but even when anyone with a functioning brain cell can see there was no threat or aggression the media twist it ,it may have been distasteful to some but no more,Mourinho,Ferguson ,Guardiola have all been regularly been more aggressive to male reporters.
    The real point is that these people do as they please because no one is holding them and their appointment to account and this is partly because the public are side tracked and misinformed by a media whose reporting of issues would not have been out of place on Play School .
    Only someone incompetent or corrupt could suggest that a cut in interest rates is required,this would be brutal but I would raise them to 5% over the next 2 years the debt addiction must be tackled before the economy can begin to recover

    • Hi PrivateFraser

      The media is in trouble and this is highlighted I think by the story that the Guardian is thinking of going back to Manchester to save on rent. Most business models in the industry simply do not work

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