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.
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?
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
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.