The Bank of England faces quite a dilemma

At the moment the minds of the Bank of England must be getting more befuddled than usual as jet lag adds to the usual problems. Once they get back from Australia ( Haldane and Broadbent) and Canada ( Governor Carney) no doubt they will set aside time to read Governor Carney’s latest speech on climate change. That is assuming the forward guidance of their various pilots is working much better than theirs as otherwise a few more flights will be required to get home. So let us open with some relatively rare good news for them. From the BBC.

Reaction Engines Limited (REL), the UK company developing a revolutionary aerospace engine, has announced investments from both Boeing and Rolls-Royce.

REL, based at Culham in Oxfordshire, is working on a propulsion system that is part jet engine, part rocket engine.

At the moment the sums are small but it is a reminder that space technology has been a success story for the UK economy over the past couple of years. It has been getting more and more mentions in the official statistics.

Ben Broadbent

Deputy Governor Broadbent has given a speech at the Reserve Bank of Australia this morning. Tucked away in it is something of a gem even for our absent-minded professor.

I discovered when writing the talk that my former colleague Paul Tucker made very similar arguments regarding accountability back in 2011.

The last thing any sensible person would do is equate former Bank of England Deputy Governor Paul Tucker with accountability. Many of you will remember the saga but for those that do not here is the Guardian from back then.

Paul Tucker, the former deputy governor of the Bank of England, is among several figures from the world of finance to receive a knighthood in the New Year honours list, despite claims that he was involved in the Libor interest-rate fixing scandal.

What has concerned our bureaucrat is what concerns bureaucrats the most everywhere which is a challenged to the bureaucratic empire.

Some have argued that, because there are significant interactions between the two, monetary and macroprudential policy should be housed not just in the same institution, but in the same policymaking committee
within the central bank. The distinct MPC and FPC should become a single “FMPC”.

Okay why not ?

The risk is that a single committee would pay
too much attention to its more verifiable objectives – the cyclical stabilisation of inflation and growth, currently
allocated in the main to the monetary policymaker – and too little to financial stability.

Yet he seems to forget this later as he remembers his boss is on both committees so we get this.

Even if the two hands are separate, it is important that the one should know what the other
is doing, and in that respect it helps that some people sit on both committees.

Indeed they do some things together.

Many economic
issues are relevant for both and, in the Bank of England, the MPC and FPC regularly receive joint briefings
on such matters.

Poor old Ben then trips over his own feet with this as an increasing number think that what he fears is the current state of play.

I think there would be risks in asking the central bank to meet a wide range of objectives with no distinctive accounting for the use of its various tools.

The housing market

Those at the Bank of England who have trumpeted wealth effects from higher house prices will be troubled by this from Estate Agents Today.

Prices are flat nationally but there are major regional variations with London seeing the sharpest fall in prices, according to the surveyors.

Respondents in the South East of England, East Anglia and the North East of England also reported prices to be falling, but to a lesser extent than in London.

Prices increased elsewhere in the UK in the last three months.

Will they now be so keen to try to push mortgage interest-rates higher and thus drive away the claimed wealth effects? Whereas at the moment the situation according to the credit conditions survey of the Bank of England reminds us that its previous policies are still having an effect.

A narrowing of spreads reflects an increase in the level of
competition in the mortgage market. In recent discussions, the major UK lenders noted that competition remains very strong.

Can anybody please tell me where the £127 billion of funding given to the banks by the Term Funding Scheme may have gone? It does not seem to have gone here.

The perceived availability of credit to small businesses decreased slightly in 2018 Q1, according to respondents to the Federation of Small Businesses’ (FSB) Voice of Small Business Index.

Also if we return to the argument provided by Ben Broadbent that a separate FPC is vital I wonder what he and they think of where the biggest impact of their TFS has been.

 competition remains very strong
and since November has increased in the higher LTV market,………..Consistent with this, the difference
between quoted rates on two-year fixed rate 90% and 75%
LTV mortgages has narrowed from 90 basis points in August to 69 basis points in March. ( LTV = Loan To Value).

As I understand it this is officially called vigilance these days.

Consumer Credit

Another example of “vigilance” can be provided here from today’s survey. You may recall that the Bank of England has taken something of a journey on this subject after Governor Carney told us this in February 2017.

This is not a debt-fuelled consumer expansion
that we’re dealing with.

Now the survey tells us this.

There has been a modest tightening in the availability of
consumer credit over the past year.

This is a reining back from the promises of a reduction that we saw in the survey for the third and fourth quarters of last year which they are no doubt hoping we have forgotten. Of course we see a sign of the Term Funding Scheme at play yet again.

Lending spreads have tightened in recent months as interest rates remained broadly unchanged following the rise in Bank Rate.

This provides two problems for the Bank of England. Firstly it has boosted consumer credit with its “Sledgehammer” policies and now we will have to face the consequences. Next is a confirmation of the earliest theme of this blog which is that Bank Rate has very little and sometimes nothing to do with the interest-rates charged in this area. In effect therefore it is somewhat impotent.



Yet again our absent-minded professor has been somewhat forgetful. For example his own move from being an “external” member to an internal one at the Bank of England was clearly beneficial for him but was bad for the idea of external members bringing fresh ideas and dare I say it independence to the Bank. Now that Rubicon has been crossed they too may now be hoping for promotion and monetary gain and hence influenced in the same way their appointment was an attempt to avoid.

Also the empire building of the current Governor who has overseen inflation in the number of Deputy Governors such as Ben is clearly something that cannot be challenged within the Bank. For example I am no great fan of macro prudential policy as when it was used in the past it failed and I notice the fanfare in favour has gone much quieter as reality has replaced hype.

Moving to the interest-rate issue that presently seems to be the topic du jour every day the Bank of England is facing something of a crisis as its forward guidance has put it between a rock and a hard place. The rock is the increases seen and expected in US interest-rates and the hard place is the trajectory of the UK economy.


The honesty is admirable but it is hard not to smile as you read why Nigeria released its inflation data an hour early today. The Hat Tip is to @LiveSquawk

It will be shortly. I published one hour earlier by accident. Forgot Watch still on London time so I released 8am instead of 9am as published 😊😊. Probably need a break/holiday. My apologies



23 thoughts on “The Bank of England faces quite a dilemma

  1. This “dilemma” will never go away, as long as you have a central bank running an economy for the benefit of people that have through a number of decades and for numerous reasons,produced a housing bubble of gargantuan proportions, so big in fact it now dictates financial policy.

    Instead of bursting the bubble and letting people know it will never be allowed to return, and rebalancing the economy, the Bank of England will merely perpetuate the same policies that produced the bubble in the first place, except this time, due to the enormous amounts of consumer debt and mortgage debt, it will be ex growth, and so it will be decades of stagflation to come(we’re already nine years in) in order to prevent the house price crash that is required. During this period, there is a significant risk – I would say almost a certainty – of a run on the pound or even a total inflationary collapse of sterling.

    So next month, whether Carney raises rates by a quarter or not is meaningless, rates are never going to “normalise” in any of our lifetimes, as that would produce the property crash required.

    Yesterday Paul highlighted how far the Uk has fallen behind Germany’s infrastructure, but anyone who travels around Europe would by comparison, also see just how run down and shabby our town centres have become, a reflection of the depressed economy, and yet we still can afford an airforce to go and bomb countries in the middle east on a regular basis on the flimsiest of evidence or justifications, whilst at the same time, our public services and NHS are teetering on the edge of total collapse?Something is seriously wrong with the governance of this country, and yet as the price of houses are maintained on its upward trajectory, the sheeple care not.

    • Is UK plc really in such a position that it can continue to sell its debt at such low rates for another decade or more?

      I just can’t see how they can keep the plates spinning much longer, they really are wobbling now.

    • Kevin, dont worry I have a fiendish plan. One which does not require an interest rate rise at all. We just offer factory made homes to young people which are priced nearer the production cost rather than the estate agent equivalents.

      The “oldies” get to keep their beloved damp pile of bricks built by and for previous generations. The young get affordable energy efficient new homes that are maintenance free.

      I think I will be selling them to begin with to folk who don’t already own a home… seems fair to me.


      • Don’t think it would work Paul, as the cost of the build of a house is small compared to the selling price, the land value is that which has been hyperinflated, check the rebuild cost on your home buildings insurance statement and you will be surprised how low it is compare to its market value.
        I know what you mean though, the Germans have got modular house building down to a tee and they are extremely energy efficient -Huf Haus being a good example.

    • ‘This “dilemma” will never go away, as long as you have a central bank running an economy for the benefit of people that have through a number of decades and for numerous reasons,produced a housing bubble of gargantuan proportions, so big in fact it now dictates financial policy.’

      Super post kevin.Bang on the money.

  2. Hi Shaun

    You are right that the BOE is between a rock and a hard place. One aspect which seems to have changed over the years is that there is a determined effort to eliminate the economic cycle; in the past recessions were ameliorated in order to avoid damage as in the 1930s but there seemed to be some recognition that they were purgative to some degree in that they cleared out the unproductive capacity in the economy and this allowed productivity to improve in subsequent periods. Nowadays they seem terrified for any sign of a downtrend and are determined to nip any such in the bud by aggressive action. The difference of course is levels of debt which will amplify any downward shift the economy but of course it is obvious that the more you try to avoid the denouement
    and the necessary purging the larger the eventual bust there will be but this seems to roll over the heads of these policymakers.

    The other thing is the prominence of the housing market, that large but unproductive sector of the economy, at least what passes for the economy. If the BOE were really doing their job they would be far more concerned about business investment and unemployment, the factors that determined future prosperity, than the housing market, which, despite the doubtful “wealth effect” has no economic significance.

    The BOE have become hostage to a “populist” view of what the economy is all about (house prices) and this, combined with an insouciance about debt levels and a futile determination to neuter the economic cycle, have led them to the position where, in effect, they can no longer act; they are trapped.

    • hi bob

      depends on who defines ” populist ”

      I have four friends , me and two others are aghast at the cost of houses for our children , can really never see them getting on the housing ladder . We all have seen not our houses just inflate but also any properties we like to upgrade to also go up in tandem .

      On the other side the 2 friends with no children and who have several properties each are happy with the gains but unhappy with CGT , and are quite happy with more to come .

      you can imagine when the conversation gets to house price fall so our kids can move out that they are not happy at all – even when I point out they still have the properties and rents and therefore made two incomes out them ( or could if they sold ) – they just can’t see it


    • ‘the more you try to avoid the denouement
      and the necessary purging the larger the eventual bust there will be’

      I agree Bob that this whole obsession with eliminating the economic cycle has created dangers far worse than the ones they were trying to avoid.

      ‘The other thing is the prominence of the housing market, that large but unproductive sector of the economy, at least what passes for the economy. If the BOE were really doing their job they would be far more concerned about business investment and unemployment, the factors that determined future prosperity, than the housing market, which, despite the doubtful “wealth effect” has no economic significance.’

      Sorry to quote such a big chunk but again,you’re bang on.The BoE and policymakers more generally,have become tied to dogmatic playbooks written by ivory towered academics and have become unable to see the wood for the trees.

  3. The more the BoE distance themselves from actually having to take a decision,the more likely that that decision will be made for them,probably at a time not of their choosing.

    The more I read your work,the more I despair and hope in equal measure

    • Hi Dutch

      There is always hope. As to the Bank of England they failed to raise interest-rates after various promises in 2014 then of course cut them in a panic after the EU leave vote. Now they may raise into a downturn. ……

  4. Hi Forbin

    We employ far fewer robots than most developed economies; we are near the bottom of the league.

    Which is more important to society’s future prosperity house prices or the number of robots we employ?

    • well I’d go with more automation but historically that old truism of British industrial investment stratergy:-

      in good times – we are making money so don’t need to invest
      in bad times we are loosing money so cannot afford to invest

      And the TBTF Bank also lend a hand

      “want our money ? give us yer house and two small children as deposit ”

      I mean back in Captain Mainwaring’s day it might have been “not the Banks money but those who deposit there” but these days with QE from a can of infinite proportions….

      Well , time to sit back and get more popcorn, cause there’s $$$$$ you can do about it – they’re all in it up to their little piggy heads….


    • I’m working on a huge pipeline project thats jut about to kick off. Anyway the welders were sitting around today doing nothing as they were waiting on specific pipe to arrive … and the man working as some sort of environmentalist for National Grid kicked off about them sitting around doing nothing.

      The irony of the most unproductive #### on site slagging off the most productive on site was seemingly lost on him.

  5. There is a bit of a Twitter spat going on between Blanchflower and Sentance with the former pointing out the BoE produce fan graphs as the lags between rate rises and effect are usually very large. The time for rate rises has probably been and gone.

    Us old dogs are experienced when it comes to mortgage price increases but there’s a whole generation of payers today that are not. If interest rates “normalise” either spending will chronically fall or credit catastrophically rise.

    There will be no right time to raise rates and forward guidence be damned, monetarism is mostly a busted flush.

    • Hi bill40

      Actually both Andrew and Danny are right and wrong in my opinion. Andrew is right to argue that interest-rates should already have been raised but is on weaker ground saying we should do so in May due to the economic circumstances. Danny has never to my recollection argued for an interest-rate rise so is wrong there but this time around it might be right to wait as timing can be as important as what you do.

      Let me offer some perspective, it is silly that a 0.25% move in Bank Rate is argued about so much. We have had much stronger effects from the moves in the £ but they often get forgotten.

  6. Great blog as usual, Shaun.
    Ben Broadbent said in his speech: “Several commentators have claimed that the financial excesses of the time [prior to the financial crisis] could have been curbed had domestic interest rates been that much higher. Indeed the case is still being made, even now that macro-prudential tools are available, that interest rates should respond to changes in financial conditions more aggressively than their implications for inflation would warrant.” In the written version of the speech this appears beneath a chart showing RPIX inflation but not CPI inflation, much above target prior to the financial crisis. However Broadbent doesn’t have any time for the people who would put housing prices, what he would call asset prices, in the target inflation measure. Anyone who wants to respond to rising housing prices by raising interest rates has to be pigeon-holed into the camp of a central banker like Canadian William R. White, who favours leaning against the wind when asset price booms were in progress, without necessarily changing the inflation measures themselves to include house prices or works of art.
    It is a somewhat arrogant, even churlish, stance considering his audience. The Australian CPI has an owner-occupied housing component based on the net acquisitions approach from its September 1998 quarter update forward. From then on it has been the target inflation indicator for the Reserve Bank of Australia, which argued strongly for the change prior to its adoption. It is similar to the net acquisitions approach recommended for Eurostat series with some differences: e.g. dwelling insurance is measured based on gross premiums, not net premiums, the dwelling acquisition component is actually measured with dwelling prices, not house (dwelling and lot) prices. However, for Broadbent, it’s not even an option worth talking about. Inflation, by which he means consumer inflation, just doesn’t relate to dwelling or housing prices, since these are asset prices and that’s all there is to it.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.