Problems mount for Mark Carney at Mansion House

The UK’s central bank announces its policy decision today and it faces challenges on several fronts. The first was highlighted yesterday evening by the US Federal Reserve.

In view of realized and expected labor market conditions and inflation, the Committee decided to raise the target range for the federal funds rate to 1 to 1-1/4 percent. The stance of monetary policy remains accommodative, thereby supporting some further strengthening in labor market conditions and a sustained return to 2 percent inflation.

UK monetary policy is normally similar to that in the US as our economies often follow the same cycles. This time around however the Bank of England has cut to 0.25% whilst the Federal Reserve has been raising interest-rates creating a gap of 0.75% to 1% now. In terms of the past maybe not a large gap but of course these days the gap is large in a world of zero and indeed negative interest-rates. Also we can expect the gap to grow in the future.

The Committee expects that economic conditions will evolve in a manner that will warrant gradual increases in the federal funds rate;

There was also more as the Federal Reserve made another change which headed in the opposite direction to Bank of England policy.

The Committee currently expects to begin implementing a balance sheet normalization program this year, provided that the economy evolves broadly as anticipated.

So the Federal Reserve is planning to start the long journey to what used to be regarded as normal for a central bank balance sheet. Of course only last August the Bank of England set out on expanding its balance sheet by another £70 billion if we include the Corporate Bond purchases in what its Chief Economist Andy Haldane called a “Sledgehammer”. So again the two central banks have been heading in opposite directions. Also on that subject Mr.Haldane was reappointed for another three years this week. Does anybody know on what grounds? After all the wages data from yesterday suggested yet another fail on the forecasting front in an ever-growing series.

Andrew Haldane, Executive Director, Monetary Analysis and Statistics, and Chief Economist at the
Bank of England, has been reappointed for a further three-year term as a member of the Monetary Policy
Committee with effect from 12 June 2017.

For those interested in what Andy would presumably call an anti-Sledgehammer here it is.

( For Treasury Bonds) the Committee anticipates that the cap will be $6 billion per month initially and will increase in steps of $6 billion at three-month intervals over 12 months until it reaches $30 billion per month…… ( for Mortgage Securities) the Committee anticipates that the cap will be $4 billion per month initially and will increase in steps of $4 billion at three-month intervals over 12 months until it reaches $20 billion per month.

Whilst these really are baby steps compared to a balance sheet of US $4.46 trillion they do at least represent a welcome move in the right direction.

The Inflation Conundrum

This has several facets for the Bank of England. The most obvious is that it eased policy last August as inflation was expected to rise and this month we see that the inflation measure it is supposed to keep around 2% per annum ( CPI ) has risen to 2.9% with more rises expected. It of course badged the “Sledgehammer” move as being expansionary for the economy but I have argued all along that it is more complex than that and may even be contractionary.

Today’s Retail Sales numbers give an example of my thinking so let me use them to explain. Here they are.

In May 2017, the quantity bought in the retail industry was estimated to have increased by 0.9% compared with May 2016; the annual growth rate was last lower in April 2013…..Month-on-month, the quantity bought was estimated to have fallen by 1.2% following strong growth in April 2017.

So after a strong 2016 UK retail sales have weakened in 2017 but my argument is that the main driver here has been this.

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

It has been the rise in prices or higher inflation which has been the main driver of the weakness in retail sales. A factor in this has been the lower value of the Pound which if you use the US inflation numbers as a control has so far raised UK inflation by around 1%. This weakness in the currency was added to by expectations of Bank of England monetary easing which of course were fulfilled. You may note I say expectations because as some of us have been discussing in the comments section the main impact of QE on a currency happens in the expectations/anticipation phase.

On the other side of the coin you have to believe that a 0.25% cut in interest-rates has a material impact after cuts of over 4% did not! Also that increasing the Bank of England’s balance sheet will do more than adding to house prices and easing the fiscal deficit. A ten-year Gilt yield of 0.96% does not go well with inflation at 2.9% ( CPI) and of course even worse with RPI ( 3.7%).

House Prices

I spotted this earlier in the Financial Times which poses a serious question to Bank of England policy.

Since 1980, the compounded inflation-adjusted gain for a UK homeowner has been 212 per cent. Before 1980 house price gains were much tamer over the various cycles either side of the second world war. Indeed, in aggregate, prices were largely unchanged over the previous 100 years, once inflation is accounted for.

A change in policy? Of course much of that was before Mark Carney’s time but we know from his time in Canada and here that house price surges and bubbles do happen on his watch. The article then looks at debt availability.

The one factor that did change, though, and marked the start of that step change in 1980, is the supply of mortgage debt……….has resulted in a sevenfold increase in inflation-adjusted mortgage debt levels since then.

This leads to something that I would like Mark Carney to address in his Mansion House speech tonight.

Second an inflation-targeting central bank, which has delivered a more aggressive monetary response to each of the recent downturns, because of that high debt burden.

On that road we in the UK will see negative interest-rates in the next downturn which of course may be on the horizon.


There is much to consider for the Governor of the Bank of England tonight. If he continues on the current path of cutting interest-rates and adding to QE on any prospect of an economic slow down then neither he nor his 8 fellow policy setting colleagues are required. We could replace them with an AI ( Artificially Intelligent ) Robot although I guess the danger is that it becomes sentient Skynet style ( from The Terminator films ) and starts to question what it is doing?

However moving on from knee-jerk junkie culture monetary policy has plenty of problems. It first requires both acknowledgement and admittal that monetary policy can do some things but cannot do others. Also that international influences are often at play which includes foreign monetary policy. I have looked at the Federal Reserve today well via the Far East other monetary policy applies. Let me hand you over to some research from Neal Hudson of Residential Analysts on buyers of property in London from the Far East.

However, anecdotal evidence suggests that many of these buyers have been using local mortgages to fund their purchases.  The limited evidence I have suggests that around half of Hong Kong and Singaporean buyers use a local mortgage while the majority of mainland Chinese buyers use one.

Okay on what terms?

The main difference is that the mortgage rate tends to be slightly higher (London Home Loan comparison) and local lenders allow borrowers to have far higher debt multiples.

These people are not as rich as might previously have been assumed and we need to throw in changes in the value of the UK Pound £ which are good for new buyers but bad for existing ones. Complicated now isn’t it?

On a personal level I was intrigued by this.

Last year I visited a development in Nine Elms and the lobby felt more like a hotel than a residential block. There were significant numbers of people appearing to pick up and drop off keys with suitcases in tow.

You see I live in another part of Battersea ( the other side of the park) and where i live feels like that as well.





37 thoughts on “Problems mount for Mark Carney at Mansion House

  1. Shaun, I wonder to what extent the drop in retail sales is driven by higher prices from inflation (regularly blamed on Brexit in the press) v the growth in unsecured debt in the form of loans or credit cards, to a level that is causing real concern for the people in debt? I am sure that the answer will be a bit of both but my anecdotal evidence suggests that most people are fairly clueless about price increases but are maxed out to the limit with personal debt and are very aware of it. We regularly have cycles of debt build up and then re payment and I wonder if we are at, or approaching, peak debt. If that is the case then retail sales will be soft no matter what inflation does.

    • Hi Pavlaki

      That is a good point and with unsecured credit having increased at around 10% per annum for a while now I am sure some must be reaching their own credit crunch. But using inflation & real wages as a signal has worked in the upside for retail sales and now the reverse.

  2. …”There is much to consider for the Governor of the Bank of England tonight…..”

    mainly the sweet trolley and the IMF openings……


    • as I have always contended that shares are one of the assets the BoE is targeting , any sustain weakness or out right slide will be met with BIRP and QE
      or something else to support the stocks

      until they can’t of course


      PS: this could be the start of the demise of support of Brexit by HMG , 2nd vote anyone ?

      or just cancel the leave notice? ( they’ll be a price , one being in the Euro )

  3. The comparison with the USA (and your earlier blogs on Japan) make me wonder whether:
    1. We acted too slowly in sorting out the banks after the crash;
    2. We put too much faith in QE in terms of general economic benefit, whereas it seems really to have helped only the banks and asset prices;
    3. The Brexit vote threw the BoE into panic mode, resulting in a plainly unnecessary rate cut plus more QE
    4. We are yet again behind the USA in returning to some sort of normality, where interest rates are used to dampen down inflation and to reward saving.
    It seems to me that the approach here has just lengthened the agony and that we have been outplayed by the USA at almost every step.

    • Hi James

      I can add to that with the fact that some people were prosecuted in the US and some bankers went to jail. Of course way short of the number that should have gone but better than us. We should have protected the depositors but let Northern Rock go as it would have sent a message to banks like RBS which were in denial.

  4. And the farce continues, the mainstream media refuse to question Carney and his committee of yes men on their obviously flawed theories and assumptions that have been proven to be wrong time and time again over the years, or even point out the glaring contradictions these policies have in economics and plain common sense that Shaun and others have been writing about on here.

    But every now and again they have to mix it up to make it look to the peons that there actually is some sort of logic and analysis behind their main objective(under Carney’s direction) which is to ensure house prices only ever go up and never fall.

    Today that gesture took the form of three of the eight member committee voting for a rise over concerns about inflation, phew, that was close, I bet all the buy to let landlords maxed to the eyeballs with multiple 100% mortgages and people with two or three “investment” properties(don’t you just love that term) are really getting worried – NOT.

    I am just waiting for Carney to issue a statement in the very near future when the pound is in freefall, stating that the committee are prepared to “look through” higher inflation numbers(caused by his policies) as they are considered “temporary”, and in any case a rise in interest rates would hurt consumers on top of the higher prices they are having to pay and hurt the economy even more.

    You have another two years of this man and his destructive policies, on top of this, there is the unfolding disaster of the BREXIT negotiations running alongside(also two years), amplifying the downward forces on sterling, with the UK negotiating position now destroyed following the general election result, with every twist of the knife resulting in further lurches down.

    My long term prediction for the UK being forced to adopt the Euro is looking more and more likely by the day.

    • Kevin, I agree with your analysis but I think the timeframe for change is now. Counter Policies to US cannot be sustained for 2 months longer let alone 2 years. The Politic climate is so unstable, the social one too. We are looking at forced hands this summer . As you say , we will pay a penalty to return to EU fine or Euro if we really f#uk up sterling.

    • Hello, Kevin. If the UK leaves the EU, the GDP share of the countries that are part of the EU but not the euro area will be cut in half, Probably the pressure on the countries remaining outside the euro will be considerably increased. If the UK does leave and wants to get back in, I doubt that it will be able to negotiate keeping its own currency indefinitely as it did at Maastricht. So you may be right.

    • Even if sterling dis-integrates, UK can have the proven IMF strategy of default and devaluation. History suggests a decent recovery within 2 years. Compare this to Greece’s 8 years and counting of misery.

  5. Carneys Mansion House speech has been cancelled tonight due to the building fire ..strange one that.

    If he drops rates and goes for more QE boosting the housing bubble onto utter insanity levels, a Corbyn led coalition is a certainty.

    • Been corrected that its Hammond cancelling his speech. Like a bubble blowing landlord such as Hammond gives a ####.

  6. Hi Shaun, yours is the right insight for the day. I was first to comment on the FT article last night about rising Fed rate. The FT correspondents follow MC groupthink, any increment higher is both dangerous and bad for the economy whereas normalisation in my mind is a pre-requisite to escape the last 10 years of “emergency”.

    Anyway I agree that all the indicators are at odds in the UK, this country is not powerful nor independent enough to run counter policies. The longer it pushes in string the worse the correction.

    I think we’ve hit the wall here, the combination of Political failure and economic dead-end is going to produce a series of bad news stories. Confidence will drain inside the UK and by those investors outside. We expect forced hands and I for one want to hear how those about turns are “explained”.

    Paul C.

    • Hi Paul C

      If the US want to return to a more normal monetary policy they need another couple of raises to get in the 1.5% to 2% range which would be my objective for a first series of moves. As to the UK this period was always going to be the “bad time” as the lower £ hits real wages and the economy via higher inflation.

  7. Great blog as always, Shaun.
    One of the differences between the way Carney operates and the way Yellen operates is there is no target range for the US Fed, only a 2% target rate. Nonetheless at the press conference yesterday, Yellen gamely maintained that the 2% target was symmetric, which would seem to mean that the US Fed tries to keep the inflation rate above 2% about the same amount of time that it is below 2%. This is hogwash. Announced in January 2012 when the PCEPI inflation rate was 2.6%, that rate has only been at or above 2% once since April 2012, in February of this year. Yet we have seen four interest rate increases over this period. As I argue in section 5 of my paper “Why the Bank of Canada’s Target Rate of Inflation Should be Lowered Rather than Raised”, presented at the annual CEA meeting earlier this month, the US Fed has obviously been targeting a lower rate of inflation on a de facto basis, as well it should:
    You have noted in the past that the remit of the Bank of England should have specified a lower target rate than 2% in December 2003 when the inflation indicator changed if it were to be a neutral change without a loosening of monetary policy. People like David Smith were already worried about its impact even before it happened. It is something for Carney to address in his Mansion House speech. Two percent inflation is too high a target not just for the Bank of Canada but for all the G7 central banks.

      • Forbin, I think you have put your finger on why a lower inflation target rate has not caught on in advanced countries. A government with massive debt would prefer higher, rather than lower inflation to deflate some of it away. Also, not everything can be uprated, so governments will generally gain more in tax revenues from inflation than they lose due to upratings of public pensions and so forth. The former Governor of the Bank of Canada, John Crow, said in his memoirs: “In the periodic business of agreeing to reset the targets, the minister demonstrably has the upper hand…[T]he hand that the government has played to date in setting targets has been biased towards propping inflation up. Even if this is not quite what the economic literature referred to above tells us is going to happen, it is a recognizable fact.” The Finance Minister doesn’t define the target rate of the central bank in a remit as the Chancellor of the Exchequer does, but he does negotiate with the Governor of the Bank of Canada what the rate will be and really has the last word.

  8. I’m afraid I have a somewhat different take on this issue.

    Carney will only increase rates if there is a collapse in sterling or wages tick up as second round effects of previous falls in sterling and there are no signs of that. However, I would not rule out a sterling collapse; whilst not highly probable it is possible particularly if the Brexit negotiations become problematical.

    Frankly I can’t say that the policy of “looking through” the increase in inflation is wrong; as long as there are no second round effects on wages and we don’t get into a wage/price spiral. Be clear, my view of the competency of the BOE is no different to the majority on here but they are not always idiots; they are just idiots 90% of the time.

    As far as the Fed is concerned I think the view they have of the US economy is totally wrong; many indicators have been going south for quite some time and to increase rates in these circumstances is odd to say the least but of course the indicators they use say otherwise. They may also have other reasons for wanting to increase rates which are not apparent.

    Both inflation and interest rates have been on a long declining path since around 1981 in the developing world so where we are now is just a continuation of this trend and I can’t see interest rates going up as part of a reversal of this trend; they may react to circumstances but not reverse the trend; we are in a deflationary world, not an inflationary one, and interest rates will reflect this; demographics is driving growth rates down everywhere and this situation will not change. Being a saver and having lost money in the last ten years due to low rates I would wish it were otherwise but I don’t think it will be.

    • I suspect the Fed knows its market better that the BoE , raise interest rates now and you’ve got room to cut them again . no silly BIRP rates

      As for the BoE being idiots I agree , ‘B’ Arkers the lots

      I’d posit that the 10% time they are right is when choosing the right wine to go with dessert of the sweet trolley ……..

      Interesting times


  9. Hello Shaun,

    I note that in 2012 we managed to gather about £12billion in tax from North Sea oil and today its virtually zero

    I don’t think a lemonade tax will make up for – for one I don’t think the nations teeth or waist line is on the HMG mind but the huge ( yuge ? ) hole in the accounts

    ant every party went into the election promising to spend more!

    and MSM reported , emr, what? , all was ok ?

    sits back and munches more popcorn ……… crazy eh ?


    • One reason why everyone promised to spend more, IMHO, is that the MSM completely ignored:
      1. The existing deficit
      2. The effect of an interest rate rise on the state of HMG’s finances
      3. The absolute level of borrowing.
      In addition, we had one party not costing anything and the other saying that it was all costed when it was clearly not.

    • I think big oil has abandoned the North Sea. The tax take has eventually killed the goose. It’s cheaper to look for oil in other parts of the world.

      • and that its small piddly fields that cost a lot to produce …

        RoW ? most is state owned or under threats fro local governments ( its not just the UK greed)

        we are very good these days in finding needles in haystacks , its just fewer , smaller needles in the NS

        best sites are Norwegian still – and thats state owned……


  10. Completely off topic, Shaun, but I have practically had a heart attack – the BBC has put out an article today questioning whether the Greek rescue package has worked. Does this mean that the mainstream media is finally awake or have they been reading your blog?

    • James, that is a distraction meme issued by the deep state by its mouthpiece, to take the heat off domestic issues but also a threat to remind us they can manage us still worse. Paul C

    • I read that earlier and raised an eye brow – it’s a very modest questioning of the Eurozone strategies by a very pro EU / Euro institution so they must rattled!

  11. Was there any early trading by those in the know prior to the retail sales figures and bank rate being announced today?

    The BBC Radio statistics programme More Or Less did an interesting item on suspicious trading based on “sneak peaks” before the release of key data a few weeks back:

    My “money” is on Skynet.


  12. Thanks Shaun another great post.
    The BoE debt powered economy is running out of road they have accommodated such levels of borrowing that if inflation continues to rise can they afford to increase rates.
    We have falling incomes,rising inflation,suppressed interest rates and a minority Government trying to negotiate Brexit.
    Cannot understand why Sterling is not falling further if it does same question will they raise interest rates or will continue to peddle the feeble excuse its good for exports the problem being we import much more than we export a fact conviently ignored by the MSM.

    • Hi Private Fraser and thanks

      Once one starts the game of thinking a currency should fall you then have to look at other currencies which often want to fall as well. In some ways it is no wonder the Swiss are making extraordinary efforts to keep the Swiss Franc as low as they can

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