What will the Bank of England claim next?

This morning has seen Reuters publish the details of an interview with one of the Bank of England’s policymakers Ian McCafferty. So let us take a look at what he said.

The Bank of England should not delay raising interest rates again, one of its top policymakers said, pointing to the possibility of faster pay rises and the recent strong pick-up in the world economy.

This is already a little awkward for our self-proclaimed inflation warrior. This is because the Bank of England has been forecasting faster pay rises for several years now usually due to output gap theory.

Speaking in his office in the BoE on Monday, adorned with books on the economy and a framed page of The Times newspaper with a headline about inflation, McCafferty said that as well as the boost from the world economy’s strong recovery, he thought there was now no slack left in Britain’s labor market.

The slack issue has been a problem for him and his colleagues for some time as this from a speech of his four years ago illustrates.

That is why, in the second phase of forward guidance that came into effect this month as the unemployment
rate passed 7%, the MPC expanded the range of indicators of labour market slack that we are formally

The first phase of Forward Guidance lasted around 6 months and it is hard not to have a wry smile as we have left both the unemployment level originally indicated and the other measure suggested by Ian well behind.

At present, these indicators suggest that the current level of slack in the economy, as reported in the
February Inflation Report, is in the region of 1-1½% of GDP, suggesting that there remains some room for
demand to recover further without exerting upward pressure on inflation.

Even if we are generous that had gone by the end of the year and yet Bank Rate is where it was then having followed the strategy of the Grand Old Duke of York when it did move. Oh and did I mention problems with forecasting a wages boom?

So the pickup in January settlements reported by a number of data providers certainly suggests that nominal pay is finally on the rise.

That is because it is from 2014 but pretty much same rhetoric has been used by the Bank of England this year. Actually Ian was embarrassingly wrong back then was average earnings fell sharply in that April meaning that the rolling three-month measure was at -0.3% in July.

What is the current wages evidence?

Ian gives us yet another regurgitation of the output gap or slack style analysis that has worked so badly for him over the past four years.

Unemployment at its lowest rate since 1975, skill shortages and signs that employers were resorting to higher wage offers to lure staff from rival firms or stop them from leaving would also create inflation pressure.

The official data does not give much of a backing for this as the three monthly average at 2.8% in January is higher than last year but by 0.6%. Also if you look back then this measure was around 3% in the late spring and summer of 2015 so it is a case of back to the future. If we move to the latest quarterly report of the Agents of the Bank of England we get what sounds like the same old scene.

Growth in total labour costs had remained modest, although average pay settlements this year were a little higher than in 2017 for many contacts (Chart 6). Most settlements were between 2½%–3½%, driven by a combination of improved profitability among exporters, the annual NLW increase and higher consumer price inflation.

As consumer inflation is set to fade there is an issue there and I will leave you to mull how government policy via the National Living Wage can lead to the Bank of England raising Bank Rate! Oh and many would regard exporters raising pay in response to higher profitability as a good thing.

There is more backing for the higher wages in prospect view from private-sector surveys such as this from this morning on Bloomberg.

U.K. firms facing a shortage of workers are pushing up starting salaries, according to IHS Markit and the Recruitment and Employment Confederation.

Pay for temporary or contract staff rose at the quickest pace in six months in March, as the supply of job candidates fell sharply, they said in a report on Tuesday. Vacancies grew across all categories, with engineers and IT workers the most sought after for permanent roles, and hotel and catering employees in highest demand for temporary jobs.

However City-AM has spotted something which Bloomberg seems to have overlooked.

However, signs of increasing pay pressure for staff in permanent roles have diminished since hitting an almost three-year high in January.

A Space Oddity

This is somewhere between confused and simply wrong and the emphasis is mine.

The BoE raised rates for the first time in more than a decade in November, saying that Britain, while growing more slowly than other rich countries because of the impact of the 2016 Brexit vote, was more prone to inflation than in the past.

If we look back to the past we have seen plenty of examples where inflation has been much higher. Ian should know this as I worked with him during one of them. But if we look more recently there are two reasons for using less not more. Firstly there has so far been no sign that the inflation caused by the fall in the UK Pound £ has had secondly and tertiary effects and rolled through the system like it used to. On the evidence so far it hit and then faded. Secondly inflation has not even gone as high as it did in the autumn of 2010.

The World Economy

This is an example of a type of space oddity.

the boost from the world economy’s strong recovery

This is an example of steering monetary policy via the rear window when you are supposed to be looking ahead via the front window. To set monetary policy correctly you would have needed to raise interest-rates around a year before this in fact you could argue somewhere around the time they cut them.

Andy Haldane

There is a clear problem in you being judge and jury on your own actions as Andy as attempted in Melbourne Australia today.

A detailed, disaggregated analysis of household balance sheets suggests the material loosening in UK
monetary policy after the financial crisis did not have significant adverse distributional consequences.

These days it only takes a couple of minutes for him to be challenged about reality which is very different to the lauding he used to get.


Personally I am disappointed that having invited Billy Bragg to give a talk at the Bank of England Andy has not produced one of these for him.

Some illustrative and tentative examples of these personal “monetary policy scorecards” have been shown.

Oh and I owe the Bank of England an apology as I though their version of sending Andy to Coventry was complete when they sent him to the Outer Hebrides whereas I now note he is giving speeches in Australia. Will he be the first man on Mars?

Also let me help him out on a subject which he has confessed to not understanding which is pensions. By my calculations his is worth at least £3.4 million will he be producing a personal scorecard?


There are two fundamental problems here. The first is the error made by the Bank of England back in August 2016 when it confused cut with raise something from which it has never fully recovered. It now has figured out that interest-rates are too low but in terms of timing would be raising in the face of falling inflation and signs of a weakening economic outlook.

Next is the issue of telling everyone it has made them better off. Apart from the obvious moral hazard involved if it was true then why does it need to keep telling us? Moving to a more technical issue it is difficult for a man who does not understand one of the biggest sources of wealth (pensions) to lecture us about it. Sweet summed it up back in the day.

Does anyone know the way, did we hear someone say?
We just haven’t got a clue what to do
Does anyone know the way, there’s got to be a way?
To Block Buster!






23 thoughts on “What will the Bank of England claim next?

  1. Bravo, Shaun another superb display of the incompetence, confusion and contradictions from Carney and his cronies.

    I cannot wait for next month, and the “expected” raise in rates!!!.

    • Hi Kevin and thanks
      As to the May Bank Rate rise the unreliable boyfriend has signalled it as clearly as the November 2016 Bank Rate cut. Remember when the plan was to either cut by or to 0.1%? Fortunately that piece of Forward Guidance was never acted upon.

  2. Excellent, Shaun. In comparison with RPI inflation, wages have gone from a low rate of increase that was more than inflation to a higher rate of increase that is level with/below inflation and therefore this change of wage rises would be contractionary, not inflationary. Have I missed something?

    • Hi Doubting Dick
      There is nothing wrong with your logic. Monetary policy involves taking your chances when they arrive as the opportunity may not come again for some time. Tomorrow’s data will be fascinating as what will the Bank of England do if we get another hint of an economic slow down?

  3. Shaun, thanks for highlighting the blockbuster of his pension pot. I think that is an outrageous retirement for folk who have crippled outlr economy with debt.

    I personally voted for Brexit because we were promised an interest rate rise by Carney and Osborne. I was ready to sacrifice our membership to do the right thing by the cost of money. I was disappointed on both sacrifices.

    No doubt in May, disMay will be so robotised by chemical agents of one kind or another that Carney will be asked to forget his mandate… again.

    • Hi Paul C

      The issue of Bank of England pensions is a serious one because it sends out an “I’m all right jack” message to the ordinary person especially with the way the pensions are indexed to the “not a national statistic” Retail Prices Index. Compared to others the Bank of England pensions have been boosted in value by the policies of the Bank itself. It is like an episode of Yes Prime Minister but without the comedy.

  4. The thing that worries me about Haldane is he will actually believe he has made us all vastly richer by creating another property bubble in 2016 on top of the 2013 bubble which was build upon the 1997-2007 bubble that wasn’t allowed to deflate … and he may well be the man at the top next year.

    I do hope he paid his own flight back as the taxpayer should only be funding one way flights to the other side of the world for his kind.

    • Hi Arthur

      I see that Ben Broadbent is giving a speech in Sydney later this week so it would appear that the Bank of England has sent something of a job lot to Australia. As to bubbles well Andy Haldane admitted to blowing one with QE a few years back. The problem though as I have argued all along is exit strategy or as Joe Walsh so famously put it.

      “I go to parties, sometimes until four
      It’s hard to leave when you can’t find the door”

  5. Hi Shaun

    One can’t help feeling that something in the water has changed over the last thirty years; at that time it was recognised that there was an economic cycle and there would be periods when we would have a recession. These days TPTB seem to be petrified at the prospect of any disturbance to the “Goldilocks” view and at the faintest whiff of difficulty in markets is met with massive knee jerk loosening.

    Of course the difference these days is the levels of debt in economies which means they are much more sensitive to interest rate changes. This increase was on the back of the great financial deregulation which took place in the 1980s. The idea that economies work better with fewer constraints may be right but only if there is a prudential or even moral limit to behavior, both by lenders and borrowers; if not then things go too far and we then find ourselves in the current (very difficult) situation where venality is the only yardstick of behavior. It seems to me we gained deregulation but have lost its complement: prudence and the one will not work without the other, in fact is a disaster in waiting without the other.

    Although the BOE is a creature of government they do have the valuable capacity of being semi detached so, as much as they might want to, they cannot abdicate a considerable degree of responsibility for the current situation. Their posturings and absurd thrashings around on these issues has reduced their credibility to virtually zero and what I find alarming is that when (not if)we have the next financial crisis they will not only be found wanting but be almost guaranteed to find the wrong solution.

    • I remember reading that all today’s high street banks are de3scended from Quaker establishments because they were the only people who put their customers before themselves during the frequent banking crises under Queen Victoria – savers quickly realised that they were more likely to get their money back from Quaker-led institutions and the other banks lost their income source.

      But it only works if tax payers don’t prop up corrupt, venal and badly-run competitors.

    • Hi Chris

      The 2% increase in employee pension contributions under NEST is not far off wage growth so we will see disposable income hit again. The idea of NEST is a good one but I always feared what might happen if its impact was felt when the economy was wobbling? We may be about to find out…..

        • Is that right? If you opt in to NEST you not entitled to a state pension even though you pay full NI – if true that ‘s a scandal – they kept that one quiet!

  6. Great blog as usual, Shaun.
    Speaking about the Bank of England, the man in charge will be back in Canada on Thursday, as one of the award recipients of the Public Policy Forum in Toronto:
    According to the Public Policy Forum he is “[t]he charismatic central banker charged with bringing two G7 economies through extreme turbulence”. Carney, with very few exceptions, is still worshipped by members of the Canadian establishment, who speak about him in the hushed religious tones normally reserved for Wayne Gretzky.

    • “The problem with wearing a facade is that sooner or later in
      life someone shows up with big a pair of scissors.” -Craig Lounsbrough.

    • Shaun, you inspired me to read Andy Haldane’s Melbourne speech, which was interesting but offputting. He notes: “Recent books on the rising tide of inequality by Thomas Piketty, Tony Atkinson, Joe Stiglitz and Branko Milanovic have, somewhat surprisingly, become best-sellers.” It’s surprising to him, I suppose, because he takes the attitude that income and wealth inequality have not increased since the global financial crisis. However, the popularity of such works is surely one indication that it has. Why else would there be such a vigorous market for them?
      Piketty, in his Le Capital au XXIe siècle (p.385) specifically dismisses the Gini coefficient, and similar measures, which he calls «indicateurs synthétiques» or synthetic indicators. (Sorry to reference the French original, but I don’t have a copy of the English translation, “Capital in the Twenty-First Century”.) On the other hand, Piketty lays great emphasis on the top centile of the income and wealth distribution, the “one-percenters”. By contrast, Haldane provides Gini ratios and data on deciles, completely ignoring the top centile of the income and wealth distribution. Surely if there is to be a civil debate on whether the Bank of England’s policies have increased inequality or not, people like Haldane should try to meet a major figure like Piketty halfway, showing his preferred measures without abandoning his own. (I can’t link economic issues to pop lyrics as cleverly as you can, but this does bring to mind Maren Morris’s line: “Oh baby, why don’t you just meet me in the middle?”)
      Haldane’s analysis is based on the UK Wealth and Asset Survey. He notes tangentially “that household surveys tend to under-sample the tails of the income and wealth distribution, in particular the upper tail.” Then he proceeds to use the data as if the results could be accepted without caveat. Branko Milanović, in “Global Inequality” (p.16) notes that “the rich tend to underreport their incomes (ESPECIALLY THEIR INCOME FROM PROPERTY) and more alarmingly for researchers analyzing income data, sometimes refuse to participate in surveys altogether.” (Emphasis added.) Since a lot of the reasoning that the Bank of England was making economic inequality worse following the financial crisis related to the rich increasing their share of property income, this serious underreporting of such income by rich respondents to household surveys should have made Haldane seriously question the validity of his results.

      • People of Haldane’s stripe tend to want to put themselves across as quasi academics with an open and analytical mind that would tend to pick up the points you have made. However they are not academics; they are in a public position in an institution that never will admit that it has made things worse; if reputation conflicts with truth it is truth that has to give way.

    • The fawning presstitutes haven’t been so benevolent recently over here in the UK have they? It’s a while since I heard or read the term “rock star” associated with him, considering his track record over here, Spinal Tap seems more appropriate?

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