The problems of the boy who keeps crying wolf

Yesterday saw the policy announcement of the Bank of England with quite a few familiar traits on display. However we did see something rather familiar in the press conference from its Governor Mark Carney.

The Committee judges that, given the assumptions underlying its projections, including the closure of drawdown period of the TFS and the recent prudential decisions of the FPC and PRA, some tightening of monetary policy would be required in order to achieve a sustainable
return of inflation to target.

Yes he is giving us Forward Guidance about an interest-rate rise again. In fact there was more of this later.

Specifically, if the economy follows a path broadly consistent with the August central projection, then monetary policy could need to be tightened by a somewhat greater extent over the forecast period than the path implied by the yield curve underlying those projections.

Yep not only is he promising an interest-rate rise but he is suggesting that there will be several of them. Actually that is more hype than substance because you see even if you look out to the ten-year Gilt yield you only get to 1.16% and the five-year is only 0.54% so exceeding that is really rather easy. Also as I have pointed out before Governor Carney covers all the bases by contradicting himself in the same speech.

Any increases in Bank Rate would be expected to be at a gradual pace and to a limited extent

So more suddenly becomes less or something like that.

Just like deja vu all over again

If we follow the advice of Kylie and step back in time to the Mansion House speech of 2014 we heard this from Governor Carney.

This has implications for the timing, pace and degree of Bank Rate increases.

There’s already great speculation about the exact timing of the first rate hike and this decision is becoming more balanced.

It could happen sooner than markets currently expect.

The print on the screen does not convey how this was received as such statements are taken as being from a coded language especially if you add in this bit.

Growth has been much stronger and unemployment has fallen much faster than either we or anyone else expected at last year’s Mansion House dinner.

Markets heard that growth had been better and that the Bank of England was planning a Bank Rate rise in the near future followed by a series of them. Tucked away was something which has become ever more familiar.

 we expect that eventual increases in Bank Rate will be gradual and limited

Although to be fair this bit was kind of right.

The MPC has rightly stressed that the timing of the first Bank Rate increase is less important than the path thereafter

Indeed the first Bank Rate increase was so unimportant it never took place.

Ben Broadbent

he has reinforced the new Forward Guidance this morning. Here is the Financial Times view of what he said on BBC Radio 5 live.

“There may be some possibility for interest rates to go up a little,” said Mr Broadbent.

It sounds as though Deputy Governor Broadbent is hardly convinced. This is in spite of the fact he repeated a line from the Governor that is so extraordinary the press corps should be ashamed they did not challenge it.

adding the economy was now better placed to withstand its first interest rate rise since the financial crisis…….Speaking to BBC radio, Mr Broadbent said the UK was able to handle a rate rise “a little bit” better as the economy is still growing, unemployment is at a more than 40-year low, and wages are forecast to rise.

Sadly for Ben he is acting like the absent-minded professor he so resembles. After all on that score he should have raised interest-rates last summer when growth was a fair bit higher than now.Sadly for Ben he voted to cut them! In addition to this there is a much more fundamental point which is if we are in better shape for rate rises why do we have one which is below the 0.5% that was supposed to be an emergency rate and of course was called the “lower bound” by Governor Carney?

Forecasting failures

These are in addition to the Forward Guidance debacle but if we look at the labour market we see a major cause. Although he tried to cover it in a form of Brexit wrap there was something very familiar yesterday from Governor Carney. From the Guardian.


We are picking up across the country that there is an element of Brexit uncertainty that is affecting wage bargaining.
Some firms, potentially a material number of firms, are less willing to give bigger pay rises given it’s not as clear what their market access will be over the next few years.

Actually the Bank of England has been over optimistic on wages time and time again including before more than a few really believed there would be a Brexit vote. This is linked to its forecasting failures on the quantity labour market numbers. Remember phase one of Forward Guidance where an unemployment rate of 7% was considered significant? That lasted about six months as the rate in a welcome move quickly dropped below it. This meant that the Ivory Tower theorists at the Bank of England immediately plugged this into their creaking antiquated models and decided that wages would rise in response. They didn’t and history since has involved the equivalent of any of us pressing repeat on our MP3 players or I-pods. As we get according to the Four Tops.

It’s the same old song
But with a different meaning

Number Crunching

This was reported across the media with what would have been described in the Yes Minister stories and TV series as the “utmost seriousness”. From the BBC.

It edged this year’s growth forecast down to 1.7% from its previous forecast of 1.9% made in May. It also cut its forecast for 2018 from 1.7% to 1.6%.

Now does anybody actually believe that the Bank of England can forecast GDP growth to 0.1%? For a start GDP in truth cannot be measured to that form of accuracy but an organisation which as I explained earlier has continuously got both wages and unemployment wrong should be near the bottom of the list as something we should rely on.


There is something else to consider about Governor Carney. I have suggested in the past that in the end Bank of England Governors have a sort of fall back position which involves a lower level for the UK Pound £. What happened after his announcements yesterday?

Sterling is now trading at just €1.106, down from €1.20 this morning, as traders respond to the Bank of England’s downgraded forecasts for growth and wages…..The pound has also dropped further against the US dollar to $1.3127, more than a cent below this morning’s eight-month high.

They got a bit excited with the Euro rate which of course had been just below 1.12 and not 1.20 but the principle of a Bank of England talking down the Pound has yet another tick in any measurement column. Somewhere Baron King of Lothbury would no doubt have been heard to chuckle. There is a particular irony in this with Deputy Governor Broadbent telling Radio 5 listeners this earlier.

BoE Broadbent: Faster Inflation Fuelled By Pound Weakness ( h/t @LiveSquawk )

Oh and I did say this was on permanent repeat.

BoE Broadbent: Expects UK Wage Growth To Pick Up In Coming Years ( h/t @LiveSquawk )


Oh and as someone pointed out in yesterdays comments there has been yet another Forward Guidance failure. If you look back to the first quote there is a mention of the TFS which regular readers will recognise as the Term Funding Scheme. Here are the relevant excerpts from the letter from Governor Carney to Chancellor Hammond.

I noted when the TFS was announced that total drawings would be determined by actual usage of the scheme, and could reach £100bn………. Consistent with this, I am requesting that you authorise an increase in the total size of the APF of £15bn to £560bn, in order to accommodate expected usage of the TFS by the end of the drawdown period.

Who could have possibly expected that the banks would want more of a subsidy?! Oh and the disinformation goes on as apparently they need more of it because of a “stronger economy”.

Also this seems to be something of a boys club again as my title suggests. We have had something of what Yes Minister might call a “woman overboard” problem at the Bank of England.





24 thoughts on “The problems of the boy who keeps crying wolf

  1. This is simply “Carney’s Law” being applied Shaun: if house price inflation is <5% then rates must not rise under any circumstances.

  2. Completely off topic, Shaun, but isn’t it extraordinary that someone like Carney gets paid so much for doing er…well, what exactly is he doing?
    1. Keeps interest rates low, as Robster says above;
    2. Gives the banks whatever they need in cheap money;
    3. Makes statements about interest rates/growth/employment at various dinners, which all turn out to be nonsense.
    I reckon, with all due modesty, that I could do that for, say, half his salary 🙂

  3. I am surprised anybody listens to this nonsense anymore, let alone report it!
    Are you the only commentator, Shaun, who exposes what a shame MC and the B of E are?

    • Hi Foxy

      I think that there are three main influences at play.
      1. So much journalism these days is copy and paste as it is easier.
      2. A desire to keep in with the Bank of England for “exclusives” and being allowed to ask questions early in the presser.
      3. Of course many described him as a “rockstar” etc and so left themselves open to having to eat their words if they change tack.

  4. Hi Shaun,
    Still the same group of people (though some have changed their name) in the same dark room, still fumbling for the same door handle.

  5. To my mind it’s been pretty clear for some time now that rates would only be raised where we had both significant price inflation (>2% certainly) coupled with sustained second round effects of inflation on wages (the wage/ price spiral) or a collapse in the £. Raising rates now would simply make a bad situation ( a reduction in real incomes) much worse by perhaps tipping the economy into a full blown recession.

    That we have not had a wage/price spiral may be related at least in part to the deflationary effects of globalization and therefore this sort of problem is unlikely to make itself felt for some time.

    As to a collapse in sterling rates would go up sharply, I assume well beyond a sustainable level and would have to quickly come down.

    The fact is we have far too much debt, both public and private and the BOE are simply trying to have their cake and eat it; by talking tough they keep sterling high and a lid on inflationary pressures thus avoiding rate increases and the necessary knock on in terms of insolvency. Who knows? they may be just be playing the part of clowns and fully realize that they are indeed talking nonsense but I wouldn’t bet on it.

    • They are either believe the nonsense they are talking or daren’t tell the awful truth about the real situation – frightening either way.

    • I think that it is a very interesting question as to whether interest rates would rise if sterling collapsed. While every classical theory would say that they have to rise:
      1. It will be obvious even to a moron in a hurry that this couldn’t be sustained;
      2. It would wreck government finances.
      We shall see…

      • As a matter of fact James I agree with you; I think it would be little more than a gesture and a pretty pathetic one at that. Let’s face it in 1992 rates went to 15% (?). Laughable and utterly incredible (in 1992 that is).

        • I remember it well, as I had just taken out a giant mortgage. If mortgage rates had gone up another 3%, the mortgage would have taken all of my salary. As it was, my entire downstairs furniture consisted of two beach chairs for two years in a desperate attempt to keep up the payments…

    • BobJ,
      It all depends on whether you believe Carney will put up rates to defend the pound or not, the fact that he won’t put them up for economic reasons and the looming collapse of sterling mean that his jawboning the markets is soon going to come to an end(Sean sums up his dis-honesty and fakery nicely by describing him as the boy that called wolf, others have likened him to the “unreliable boyfriend”).His credibility along with the Bank of England is now surely destroyed and noone really takes anything he says about raising interest rates seriously anymore.

      I think that he is so arrogant and complacent that even large falls will not make him budge, I also think he is working for a group of people who are out to totally destry this country to pursue another agenda (but that’s another topic entirely).When sterling does start to collapse, his main concern will be for the banks first and foremost and secondly(and connected to the first of course) the housing market, this means he will point blank refuse to raise rates to protect the £ until it is way too late.

      The fact that he has got away with conning the people as to hids true intentions for so long just goes to show that we no longer have real markets -bond, stock or currency, and that the pound will have the trapdoor it is currently resting on, opened when it suits those mentioned above,which I believe will ultimately conclude with us dropping the pound and taking the euro, probably as a result of the BREXIT negotiations reaching their final impasse, leading to us rejoining the EU and this miraculaously coinciding with the collapse of sterling.Joining at a EUR/GBP of 1.3-1.5???

      • Kevin

        I think the point about a collapse in sterling is that putting up IRs is pointless; it’s nothing more than a futile gesture because rates would have to so high they would be quite literally incredible.

        As to saving the housing market in the case of a collapse in sterling I don’t see it as possible. If he puts rates up (and I don’t think he will) folk won’t be able to afford the repayments. Furthermore the collapse will put up inflation quite sharply which means an increased cost of living.

        The argument is the same as now; we have far too much debt and cannot afford “normalized” interest rates full stop. Carney et al have been in a box for the last ten years and there they stay.

    • Yes but this wider than the UK, monetary policy is far too loose globally and there may well have to be sharp rate rises globally next year if money supply doesn’t calm down quickly.

  6. HI Shaun
    I think the markets agree with you as GBP falls on growth/inflation comments and believe he is the boy who cries wolf yet again on raising interest rates.
    I can’t see any movement there as some parts of the economy is slowing at present in the form of auto sales/house sales etc . We will see.

    • The central bankers must lie awake at night worrying that having fired their bazookas, wielded their sledgehammers etc they have nothing left for the forthcoming slowdown. Unfortunately the competitive devaluation of currencies has prevented them using their common sense and returning interest rates to sensible levels when the economies could have weathered it. Its too late now.

  7. Hi Shaun
    I would like to ask MC what set of circumstances would
    he need to raise interest back up to the emergency rate?
    As the championship gets underway the Canaries new
    manager is Mr Farke,pronounced Farker, can you suggest a
    chant for him if they do badly :0)


  8. “Oh and the disinformation goes on as apparently they need more of it because of a “stronger economy”.

    Well, when I read the report it said to me that potential GDP growth was down based on an increased inflation forecast despite expected falling demand if the current rate of 0.25% is assumed. The answer, as they see it is therefore to increase rate in order to control forward projected inflation which they acknowledge will result in lower GDP.

    So, not at at all what you are reporting. We are in disagreement.

  9. Shaun, well done for calling it the way it is. MC is the boy who cried wolf AND the unreliable boyfriend all rolled into one.

    So he knows he cant raise rated but knows he must also pretend that he shall. We must truly be in a mess.

    As your other posters clearly say, that he does not care about Sterling must underly a greater story or devious plan….. Abandon Brexit, join the Euro at a low exchange value, settle negotiations /debts at parity. I suspect a contrivance to engineer a economic crisis to try and duck Brexit whilst strike out publc and private debt burdens.

    We shall see in the Brsxit resolution time window.

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