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?