Yesterday the Governor of the Bank of England visited the Great Exhibition of the North and went to Newcastle but sadly without any coal. As usual he was unable to admit his own role in events when they have gone badly and this was illustrated by the sentence below.
We meet today after the first decade of falling real incomes in the UK since the middle of the 19th century.
Perhaps he had written his speech before the Office of National Statistics told these specifics on Wednesday but he should have been aware of the overall picture. The emphasis is mine.
Both cash basis and national accounts real household disposable income (RHDI) declined for the second successive year in 2017. This was due largely to the impact of inflation on gross disposable household income (GDHI),
The issue here is that the Bank Rate cut and Sledgehammer QE sent the UK Pound £ lower after the EU Leave vote. Just for clarity it would have fallen anyway just not by so much and certainly not below US $1.20, After all we have seen it above US $1.30 now and if you look back you see that it has in general two stages. The first which was down accompanied the period the Bank of England promised more easing – it is easy to forget now that they promised to cut Bank Rate to 0.1% in November 2016 before events made it too embarrassing to carry it through – and then once that stopped stability and then a rise. With a lag inflation followed this trend but with a reverse pattern. So if we return to the data above we now see this.
On a quarter on same quarter a year ago basis, both measures of RHDI increased in Quarter 1 2018. Cash RHDI increased by 2.4% and national accounts RHDI grew by 2%;
Now the inflation effect has faded the numbers are growing again. Again not all of the effect is due to it dropping as stronger employment has helped but it is in there. As a final point these numbers make me smile as I recall some of you being kind enough to point out my role in us finally getting numbers without the fantasy elements.
This bulletin provides Experimental Statistics on the impact of removing “imputed” transactions from real household disposable income (RHDI).
It would not be a Mark Carney speech if he did not reverse what he told us last time as he racks up the U-Turns. First he did some cheerleading for himself.
That approach has worked . Employment is at a record high. Import price inflation is fading. Real
wages are rising.
This of course relies on the power of a 0.25% Bank Rate cut ( plus more QE) but sadly nobody asked why if that is so powerful why the previous 4% or so of cuts did not put the economy through the roof? Also his policies made imported inflation worse and real wages are only rising if you choose a favourable inflation measure.
Also we got what in gardening terms is a hardy perennial.
Now, with the excess supply in the economy virtually used up
It has been about to be used up for all of his term! Remember when an unemployment rate of 7% was a sign of it? Well it is 4.2% now. But in spite of the obvious persistent failures it would appear that it is deja vu allover again.
The UK labour market has remained strong, and there is widespread evidence that slack is
largely used up.
Next we get this
Domestically, the incoming data have given me greater confidence that the softness of UK activity in the first
quarter was largely due to the weather, not the economic climate.
A number of indicators of household
spending and sentiment have bounced back strongly from what increasingly appears to have been erratic
weakness in Q1………….Headline
inflation is still expected to rise in the short-term because of higher energy prices.
Leads to the equivalent of something of a mouth full and the emphasis is mine.
As the MPC has stressed, were the economy to develop broadly in line with the May Inflation Report
projections – with demand growth exceeding the 1½% estimated rate of supply growth leading to a small
margin of excess demand emerging by early 2020 and domestic inflationary pressures continuing to build
gradually to rates consistent with the 2% target – an ongoing tightening of monetary policy over the next few years would be appropriate to return inflation sustainably to its target at a conventional horizon.
For newer readers unaware of how he earned the nickname the unreliable boyfriend let me take you back four years and a month to his Mansion House speech.
The MPC has rightly stressed that the timing of the first Bank Rate increase is less important than the path
thereafter – that is, the degree and pace of increases after they start. In particular, we expect that eventual
increases in Bank Rate will be gradual and limited.
Well he was right about the limited bit as it is still where it was then at the “emergency” level of 0.5%. Actually of course he was believed to have been much more specific at the time.
There’s already great speculation about the exact timing of the first rate hike and this decision is becoming
It could happen sooner than markets currently expect.
The next day saw quite a scramble as markets adjusted to what they believed in central banker speak was as near to a promise as they would get. You may not be bothered too much about financial traders ( like me) but this had real world implications as for example people took out fixed-rate mortgages and then found the next move was in fact a cut.
Yet some saw this as a sign as this from Joel Hills of ITV indicates.
Mark Carney signalling that, despite all the uncertainty, “gradual and limited” interest rate rises are looming. Market is betting that Bank of England will probably increase Bank Rate in August.
Just like in May when they lost their bets as part of a now long-running series. The foreign exchange markets have learnt their lesson after receiving some burnt fingers in the past and responded little. Perhaps they focused on this bit.
Pay and domestic cost growth have continued to firm broadly as expected.
Now if we start in December the official series for total pay growth has gone 3.1%, 2.8%, 2.6%,2.5% and then 2.5% in April which simply is not “firm” at all. Of course central bankers love to cherry pick but sadly the season for cherries has not been kind here either. If we move to private-sector regular pay as guided we see on the same timescale 2.9%, 3%, 2.8%, 3.2% but then a rather ugly 2.5% in April. There are few excuses here as they have excluded bonuses which are often high in April.
We have been here so may times now with the unreliable boyfriend who just cannot commit to a Bank Rate rise. Each time he echoes Carly Rae Jepson and ” really really really really really really ” wants to but there is then a slip between cup and lip. If we look back to May which regular readers will recall had been described by the Financial Times as an example of forward guidance for an interest-rate rise the feet got cold. If they do so again will we see wage growth as the excuse? We do not know this month’s numbers but as we stand they looked better back then than now.
If we look over the Atlantic we see a different story of a central bank raising interest-rates into an apparently strong economy and promising more. We are of course between the US and Euro area in economic terms but in my opinion it would have been much better if we had backed up the rhetoric and now had interest-rates of say 1.25%.or 1.5%. If we cannot take that then what has the claimed recover been worth.
Considering all the broken promises and to coin a phrase four years of hurt this is really rather breathtaking,