The Bank of England is in a mess of its own making

Today is what is called Super Thursday at the Bank of England although if the brief history is any guide it rarely lives up to the moniker! Actually it is a bit like its Governor Mark Carney whose stewardship has been much more hype than substance.  Indeed only recently we saw that demonstrated by the Charlotte Hogg episode where someone was promoted to the Monetary Policy Committee ( MPC) who when quizzed by Parliament was ignorant of many of the details. In fact as the Deputy Governor for Markets she would have been in charge of the £445 billion QE portfolio a subject about which she knew so little the Treasury Select Committee suggested she spoke to the Debt Management Office ( so she could learn something…). Yet according to Bloomberg the official Bank of England view is from an alternative universe.

Her departure “came at a critical time and represented a material loss to the management of the bank,” the BOE’s Court of Directors said,

Indeed her sacking for breaking rules that she had set is apparently “entirely disproportionate”. The rules presumably were for the little people and proles not for the daughters of baroness’s and earls it would seem. In the same way that whistleblowing rules seem not to apply to Jes Staley of Barclays. By the way this is the banking sector which we are so often told is completely reformed.

Women Overboard

The Carney era has come with protestations of more diversity and at first it seemed like that as more women were appointed. But the more hype than substance theme has appeared in 2017 as they seem to be leaving to go elsewhere. The two women who were on the MPC have either left or are going. Ironically the planned replacement Charlotte Hogg lasted not much longer than a May Fly. Then on April 20th the Financial Times reported this.

Jenny Scott, the executive director for communications at the BoE, is leaving to “pursue new opportunities, including those in the third sector”, according to an internal memo sent to Bank staff on Wednesday.

This is so reminiscent of the Yes Prime Minister episode on equal opportunities where the woman concerned says this about the situation.

I find it  comic, but then it is ( the civil service) run by men after all…. most of the work here needs only about 2 O’Levels anyway.

It is also quite a change of tack from the Financial Times from its previous gushing reviews of what it called a “rock star” central banker.

The “Early Wire” Problem

One of Governor Carney’s reforms was that the MPC now votes the day before the announcement. So that at 12 pm today we will be told the results of yesterday’s vote. The danger is of it leaking and makes one wonder about this from the Financial Times.

Two MPC members thought to have voted for increase at latest meeting

That may or may not be right but before the event there are clear fears they may now especially at a time of warnings like this from the Royal Statistical Society.

One of our key requests in this regard is for the government to end the practice of pre-release access to official statistics, whereby ministers and their officials have access to official statistics before they are released to the public.

Forward Guidance

This has of course turned out to be a anything but as it quickly became something of an oxymoron. There were plenty of ch-ch-changes in it as reality proved regularly inconvenient but they were quickly dwarfed by promises of interest-rate rises suddenly metamorphosing into a Bank Rate cut last August. Down was indeed the new up.

Next there was the issue of the post EU leave vote forecasts which were completely wrong which was especially material when the Bank of England cut Bank Rate and added both an extra £60 billion of ordinary QE and £10 billion of Corporate Bond purchases in response to a slow down which never happened! It has responded with a PR campaign to say that its move averted a slow down which would have been a new experience for the UK economy as monetary policy moves have always been considered to fully impact some 18 months or so after the change. Even worse for the spinners at the Bank of England the ECB has offered the view that the lags are now in fact longer than in the past.

The economic outlook

The outlook for inflation has been a problem for the credibility of the Bank of England ever since it cut Bank Rate last August as it did so in spite of expectations of it going above target. It ignored the impact of a weaker Pound £ and ploughed ahead anyway and already we see that consumer inflation is above target and set to go higher. In terms of how much higher both we and the Bank of England have got lucky with the recent dip in oil prices and the stronger trajectory for the Pound £. That was symbolised for me yesterday as I passed a garage in Vauxhall selling a litre of both diesel and petrol for 115.2p. That one is always at the cheaper end of the spectrum but fuel prices at the pump have dipped.

If we move to the prospects for GDP then we are now in the phase which I thought was going to be the difficult bit which was when inflation impacted on real wages. Today’s output and trade data have been in line with that as they were weak. You can excuse the production data as it was affected by mild weather and consequent low electricity output which was 80% of the March fall but manufacturing and trade were both poor.

The overall trade deficit (goods and services) widened both in Quarter 1 2017 and in the month of March, primarily driven by an increase in imports of oil, chemicals, mechanical machinery and motor vehicles. The total trade deficit in Quarter 1 2017 widened by £5.7 billion to £10.5 billion………The monthly fall of 0.6% in manufacturing was broad-based across 8 of the 13 sub-sectors.

Comment

The Bank of England finds itself in a very awkward position for an activist central bank. The Governor has the obvious problem that he told us that the “lower bound” for Bank Rate was 0.5% and then cut it to 0.25%! Should we see a phase of sustained economic weakness then presumably he would vote to cut again ignoring the fact that at such levels the economic gains are in my opinion offset by the losses such as the rise in unsecured credit. Which brings me to my next point if we are going to have a crony culture at the Bank of England why do we need the other 8 MPC members? Any dissent is so rare and has never been policy changing under Mark Carney’s tenure. Indeed Kristin Forbes waited  until after announcing her departure to actually vote for an interest-rate rise confirming the theme of members getting hawkish on the way out. Perhaps the most extreme case of that was the uber dove David Miles who suddenly claimed he was on the edge of voting for  rate rise.

Today is likely to see at least one vote for a Bank Rate rise but does anybody reading this really feel there is any stomach on the MPC for one? The last sequence of votes for a rise faded and ended up in a cut. Also do they still know where the switch is?

 

 

 

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24 thoughts on “The Bank of England is in a mess of its own making

  1. hello Shaun,

    I think they know where the tea trolley is , assuming they’re wake in the afternoon after a nice heavy lunch……..

    they’re all “B” arkers as you know.

    sit back an watch the show…… here, have some popcorn 🙂

    Forbin

    • Hi Forbin

      Well if they follow the example of the Financial Times then Thursday is cake trolley day so the MPC did perhaps have something to look forwards too! As to the popcorn then some toffee popcorn please 🙂

  2. Shaun, I just overheard some of MC whilst queuing for my gruel in the canteen. What a dreary drawl of obscufraction. Jam tomorrow as always for workers as their wages will rise but not now, inflation up but not obviously where the govt and BoE would like it. Prospects are better but obviously not good enough to generate pay rises for workers and big warning…. IRs going up but the year chosen in 2019 is so far away that we should remain comatose.

    This is a charade of Govt making, an administered economy where we return to a feudal model of operation with serfs ( zero hour contractors) and Banker Barons Lording it permitted by deferential polititians completely void of scruples.

    You can see I am getting revved up for the inevitable landslide Tory coronation. More gruel, perhaps with soggy popcorn anyone?

    • Hi Paul C
      That wages forecast really was something wasn’t it? As if by magic the wages fairy will appear and everything will be okay. This ignores what has happened so far in the credit crunch era and continues the massive optimism of the Bank of England for this area. As to interest rates rising well Mark Carney has moved the timing to coincide with his own departure. ..

  3. Hi Shaun
    I see that the BBC is saying that it is all the fault of Brexit. No mention of the IR cut, which weakened sterling.
    They also compared the GDP figures of Qtr 1 to last years Qtr 4, not last years Qtr. 1. Which as you have suggested before that Qtr I figures always seem low, would be a more useful comparison.
    I have also read that the service section did well in April, so GDP figures may well be up for that month. I think that Easter being in April instead of March may have confused the B of E a little bit.
    Perhaps all is not lost yet!

    Nick

    • ” the fault of Brexit. No mention of the IR cut, which weakened sterling.” YOu might like to ponder why the rate was cut at that point.

      • Yes David, I’ve pondered that. I can’t understand why any Govnr. would cut the bank rate in the face of an already considerably weakened £. Didn’t the referendum result knock it down far enough? How low does the £ have to be? how much inflation is enough? The MPC didn’t raise the rate last time inflation was above target. Will they next time? Since the £ has risen a bit since last August will he cut again? Much to ponder.

    • Hi Nick

      There has been an issue of seasonality with Q1 GDP data which has affected the US but seems to have impacted here too in the last 3 years. There have been associated problems with Easter in the past as I note that both surveys of retail sales and the ones you mention have been stronger for April . Yet these matters get so little airing. …

  4. Sterling’s rally is over for now, Carney will spend the rest of his tenure explaining how it is impossible to raise rates to quell the inflation he created as it would hurt mortgage payers(who are struggling to pay for their overpriced house – due to him keeping rates too low for too long!).

    In the unlikely event of a rise in rates, they will only put rates back to where they were before he panicked post BREXIT- a quarter point rise.

    In the event of any falls in house prices that result, expect those free market Tories to come out with a raft of subsidies, grants and just plain old cash bungs for first time buyers.

    It’s an over used cliche, but the Bank of England under Carney has really painted itself into a corner from which there is no real escape. They will defend the housing bubble they have created at all costs, even to the point of destroying the nations currency, and then have the chutzpah to blame it all on BREXIT voters.

    In the event of some external economic shock that causes central banks worldwide to raise rates, the UK will face the nightmare scenario of a housing market collapse AND a currency collapse as Carney and his bunch of yes men(oh sorry, and yes women) would be so far behind the curve that sterling would be destroyed in the process.

    And Theresa May’s government will sit back and let him do it! Well it’s very important to maintain the independence of the Bank of England isn’t it? certainly much more important than allowing a globalist egomaniac destroy an entire country, its economy and its currency.

    • Yes i’ve always expected that they were willing to destroy the currency to save the property market and now is the time that they’re actually going to do it.

      What a time to have savings and be priced out of the property market!

  5. In my more tin foil hat moments I often think scrap all central banks and just let the BIS set rates. We are all monetarists now, take a look around, who’s doing anything different apart from Japan? Hollande made a half hearted effort and was soon put back in his and there’s nobody can tell me Venezula got into it’s current mess all by itself.

    Or have a look at dear old blighty and Jeremy Corbyn. There are only two countries in the world who consider him a hard left radical, the USA and UK, everywhere else he’s mainstream left. This has serious implications for democracy in that no matter how you vote the economic policies remain the same. Labour propose nothing radical.

    Can I take my tinfoil hat off yet?

    • its sometimes feels as if I have a tin foil hat too. It just strikes me that all the QE and low IR combines with HMG programs just seem to be there to prop up – not the housing market per se but the Banks

      the economy is not as such recovering ( remember plenty of people did well during the 1930’s depression ) as CTD . All this asset boosting will do is stave off the inevitable bust

      about 30 year I think since either 2000 or 2008 , so thats 2030- 2038

      can you imagine what the housing market will be like before then?

      tulips come to mind.

      also I cannot rule out unknown unknowns ….. black swans like to turn up unexpected .

      interesting times indeed ……………. leading to Dune ( or homeworld )

      Forbin

      PS : there’s room on the sofa, and popcorn too ……..

  6. Hi Shaun,

    This seems appropriate: A summary of Mr Carney’s various positions on the relationship between “shadow banking”, the global financial system and the rest of us. It is, I think, worth noting Mr Carney’s damascene conversion in early April, 2012 when he goes from “Shadow banking must be dragged into the harsh light of day and both it and global banks must be forced to serve the real economy” to “the answer is to embrace the world of “shadow banks”, the loose collection of non-bank financial groups” in one fell swoop.

    In a bid for populism we should perhaps rename him Volty McVolte-face?

    • Hi majorfrustration

      My old boss had a saying that a group of about 1000 people ran the country and gave all the best jobs to each other. I think that the group is larger than that but not massively so. It is also an international issue as I recall Barroso’s son being the only person not to have an interview before being employed by the Bank of Portugal

  7. The Day of Reckoning has arrived. As I have long said, it is pointless cutting rates below 4%, since it just fuels an asset boom, especially in housing where lending is somewhat more flexible than anywhere else.

    The problem is asset booms is that they come to an end – however much the clowns at the BoE think they can prevent it. They end, because eventually, the capital borrowing is too great and has to be paid back – unlike the interest element, which can be changed by rate changes. That debt has to be paid back – so reducing the amount of money available for consumer spending and so, the economy slows down.

    Today, i also saw a large furry animal relieving himself amidst a group of trees.

  8. The majority of the voting population have been brainwashed into thinking that an economy drowning in debt and where savers get no return for their money is a sucessful economy and that there can be no alternative to these policies which will end in economic meltdown.
    I was in the Nationwide Building Society last week and was shocked at savings rates.
    Instant Acess Account deposit £50000 interest was 0.55% so save money but actually lose money with RPI at 3.1%.
    We are past the debt tipping point if there is normalisation of interest rates to where they need to be over 3% many would be in trouble,so expect more QE and other manipulation until they run out of road and we go off the cliff.
    Carney and the rest of the MPC are receiving payment for fiddling while Rome burns.

    • I’d say the voting population know its not right (52%), hence anti establishment outcomes such as Brexit, Trump and the rise of people like Corbyn, Le Pen, Farage.

  9. Has anyone been following the collapse of Canadian mortgage lenders (Home Capital Group and Equitable) followed by Moody’s downgrade of the Canadian banks? What ever happened to that Governor of the Bank of Canada, Mark Carney, who kept interest rates nailed to floor and sparked a housing bubble in Canada? I hope he didn’t get an important job anywhere else.

    • Hi Ian

      No I believe he disappeared into obscurity..

      More seriously I have noted the booming UK car finance data today which only adds to some of my previous articles about unsecured credit. Although of course Governor Carney started calling car finance secured credit not so long ago which to my mind skips the depreciation issue. Should he manage to get the IMF job any issues in Canada and the UK will be ignored I would imagine just like the past actions of Christine Lagarde have been.

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