Mark Carney is back making promises about interest-rates

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).

Forward Guidance

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.

And this.

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
more balanced.
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.

Comment

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,

 

 

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22 thoughts on “Mark Carney is back making promises about interest-rates

  1. Hi Shaun,
    Ten years ago the late Steve Jobs used the expression “just a bag of hurt” in describing why Apple had been slow to adopt Blu-Ray technology. In fact Apple subsequently moved away from optical disc technologies, and Blu-Ray hasn’t materialised on an Apple computer.

    The unreliable boyfriend has managed to generate a whole truckload of hurt. That’s quite an unenviable achievement. In fact the scale of it is so great I can’t find anything written by Lewis Carroll that comes anywhere near describing it.

    • Hi Eric

      Your use of the word hurt reminded of this which with apologies to Nine Inch Nails I will always associate with Johnny Cash.

      “I hurt myself today
      To see if I still feel
      I focus on the pain
      The only thing that’s real
      The needle tears a hole
      The old familiar sting
      Try to kill it all away
      But I remember everything”

  2. Mike Carney may be breaking more promises soon due to a fall in productivity in the first quarter of this year.
    https://www.ft.com/content/28002568-80f8-11e8-8e67-1e1a0846c475

    I had a suspicion the high employment just wasn’t productive enough a lot of jobs lower paid, seems in the first quarter of this year there were more hours worked so the decline in productivity cannot be totally put down to bad weather.

    The UK is well behind the US and Europe so far as productivity is concerned and the recent data from the ONS is quite concerning.

    The BOE has said time and time again productivity needs to improve to benefit GDP its just not happening.

    The UK is clearly in one almighty mess at the moment and both BREXIT and Trumps tariffs will make things worse.

    If there is ever been a time when a recession appears to be knocking on the UK door it appears to be very near now.

    • Hi Peter

      I am relatively sanguine about these numbers for several reasons.

      “UK labour productivity is estimated to have fallen by 0.4% in the first three months of the year, as a result of continued strength in employment growth combined with weaker output growth; ”

      Since around 2012 the employment numbers have been a better guide that the output ones. Also I think that productivity only really applies to a certain number of jobs and as you write the jobs growth is elsewhere. Would you rather they did not get a job? The real issue is in industries which are internationally competitive I think.

      • Hi Shaun,

        I would like full employment but in reality that tends to push up inflation, there has to be a balanced economy.

        In fact If I had my way I would seek to have some of our prisoners work 16 hours a day on some low task works like cleaning our streets and towns, then other people can do more productive work.

        I also agree with your analysis on productivity and being international competitive..

  3. Shaun, another excellent take down of this bag of wind. I correctly forecast no change of rates in June but I’m not so sure about August. Fingers crossed for a 0.25% rise.

    Regarding his speech, the cheeky b8gger says “were the economy to develop broadly in line with the May Inflation Report projections . . . an ongoing tightening of monetary policy over the next few years would be appropriate” in which case why didn’t he raise rates in the June meeting?

    I despair – a five year-old lying about the missing biscuits would make a more consistent argument.

  4. It must be an amazing world if you live in a an ivory tower. No disagreeable people pointing out your errors. No waiting for trains or at airports. No ghastly voters to suck up to. Probably a rather agreeable office and dining room. Invitations to countless events to meet other “people like us”. Every word you say is revered by mainstream media. You draw a salary without actually doing anything. Maybe an honorary knighthood.
    Bit of a shock, of course, when the plebs vote for Brexit despite your warning them not to, but you can always go back to Canada or Goldman Sachs.

  5. So will Carney or wont Carney vote for a rate rise in August?

    “mortal blow to MPC hawks who want to raise rates
    Labour productivity grew by 0.9% vs a year ago; this remains noticeably below the long-term trend observed before 2008 when productivity growth averaged nearly 2% per annum & suggests the “productivity puzzle” remains unsolved”

      • Perhaps Danny should think back to 2008 to see if he can remember anything of significance that happened around that time that may explain why productivity growth has been so low for so long…… but don’t hold your breath for any startling revelations. As my Economics lecturer (circa 1964) used to say – there are none so blind as those who will not see.

    • All the zombie businesses propped-up by share buy backs and cheap loans are responsible for apalling productivity, mainly indeed the public sector and those serving it. And, no the Govt does not want it to end, in their eyes, despite crumbling infrastructure and poverty increasing they see a placated serfdom submitting to their BS.

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