Decision day and the Inflation Report arrive at the Bank of England

Today brings us to what is called Super Thursday as not only does the Bank of England announce its policy decision but we get the latest Inflation Report. Actually the Bank of England has already voted in a change decided upon by Mark Carney so that the official Minutes can be released with the decision. The problem with that comes from the issue that there is plenty of time for any decision to leak. That is on my mind this morning because markets have seen moves and activity.

Sterling extended its gains on Thursday……….

The pound jumped 0.9 percent to as high as $1.2881  sending the currency to a five-day high.

Against the euro, it rose to 88.155 pence per euro  before settling up half a percent at 88.21 pence. The gains follow a rise for sterling on Wednesday.

Now let me switch to interest-rate markets.

Short Sterling being hit in monster clips this morning 20k plus sells. ( @stewhampton)

For those unaware Short Sterling is the future contract for UK interest-rates and is somewhere where I worked back in the day in its options market. The confusing name comes I guess because they were trying to describe short-term interest-rates for sterling and it all got shortened. Anyway @stewhampton has continued.

Continuation of yesterday’s price action, all sells. Smacks of a surprise BOE vote on the hawkish side to me.

Looking at the actual movements we see that the contract for September 2019 was some 0.05 lower at the worst. For comparison an actual Bank of England move is usually 0.25%.

The Shadow MPC

The Times newspaper runs a Shadow Monetary Policy Committee so let us take a look at what it decided.

Sir John Gieve, Charles Goodhart and Andrew Sentance, all former Bank ratesetters, called on the monetary policy committee to increase rates after the £103 billion of fiscal loosening over six years unveiled in Monday’s budget.

Sir Steve Robson, a former Treasury mandarin, Geoff Dicks, a former member of the Office for Budget Responsibility, and Bronwyn Curtis, a non-executive member of the OBR, agreed. All six also cited the tight labour market, with unemployment at a 43-year low of 4 per cent, and rising wages.

On a personal note it is nice to see that Charles Goodhart is still active as he wrote a fair few of the books I read on UK monetary policy as an undergraduate. Also not many people call for a rise in interest-rates at their own semi-retirement party as Andrew Sentance did on Tuesday!

Before I move on I would also like to note that some seem to be catching up with a suggestion I first made in City-AM a bit over five years ago.

Of those who voted to hold rates, Rupert Pennant-Rea, a former deputy governor at the Bank, said that the MPC should start unwinding the £435 billion quantitative easing programme — signalling a bias on The Times panel for tighter policy.Ms Curtis and Sir Steve also called for QE to be wound down.

Decision Day

These are always rather fraught when there is the remote possibility that something may happen. Back in the day that usually meant an interest-rate change and moves were regularly larger which we returned to for a while with the cuts post credit crunch. These days it can also reflect a change in the rhetoric of the Bank of England as well as its Forward Guidance. That is of course if anyone takes much notice of the Forward Guidance which has been wrong more often than it has been right.

But you can have some humour as this from @RANSquawk shows.

Lloyds on – Prices have reversed from the 1.2660 range lows, back through 1.2850 resistance – This, along with momentum back in bull mode, supports our view for a move back towards the top of the 1.2660-1.3320 range

Yes now it has gone up the only way is up and you can guess which song has been linked to on social media.

Doubts

If we now look at the other side of the coin there have been other factors at play over the past 24 hours. First there was the announcement by Brexit Secretary Dominic Raab of progress followed this morning by this.

The UK has struck a deal with the EU on post-Brexit financial services, according to unconfirmed reports.

The Times newspaper said London had agreed in talks with Brussels to give UK financial services firms continued access to the bloc. ( BBC)

On this road we see reasons to be cheerful for the UK Pound £ and also a possible explanation for the lower short sterling. After all a Brexit deal and a likely stronger Pound £ might mean the Bank of England might raise interest-rates again at some future date. Of course we are building up something of a Fleetwood Mac style chain here as we are relying on the words of journalists about the acts of politicians influencing an unreliable boyfriend. Oh well.

House Prices

Having gone to so much effort to raise house prices for which during the tenure of Governor Carney the only way has indeed been up this will worry the Bank of England.

October saw a slowdown in annual house price growth to
1.6% from 2.0% in September. As a result, annual house
price growth moved below the narrow range of c2-3%
prevailing over the previous 12 months. Prices flat month-on-month after accounting for seasonal effects. ( Nationwide)

Reuters have implictly confirmed my point about Mark Carney’s tenure.

That was the weakest increase since May 2013, before Britain’s housing market started to throw off the after-effects of the global financial crisis.

Manufacturing

There was also a downbeat survey from Markit released at 9:30 am.

The seasonally adjusted IHS Markit/CIPS Purchasing
Managers’ Index® (PMI®) fell to a 27-month low of 51.1,
down from September’s revised reading of 53.6 (originally
published as 53.8).

Of course that 27-month low was when they got things really rather wrong after the EU Leave vote and perhaps most significantly helped trigger a Bank of England rate cut. As to factors here I think it is being driven by the automotive sector and the worries about trade generally. In some ways this measure has in fact been a sort of optimism/pessimism reading on views about Brexit.

One slightly odd feature of the report was this as we recall that a number above 50 is supposed to be an expansion and  after all they do measure down to 0.1.

At current levels, the survey indicates that factory output could contract in the fourth quarter, dropping by 0.2%

 

Comment

As you can see there is much for the Bank of England to consider this morning as they advance from a full English ( Scottish & Welsh versions are available) breakfast to morning coffee and biscuits. After all having voted last night there is not much to do until the press conference at 12:30 and less than half of them have to attend that. But as to a rate rise today I think it is time for some Oasis.

Definitely Maybe

Whilst some might say it is on the cards I think that if we add in the weak monetary data we have been watching in 2018 it would be an odd decision. After all it is promising to raise interest-rates like this.

As little by little we gave you everything you ever dreamed of
Little by little the wheels of your life have slowly fallen off
Little by little you have to give it all in all your life
And all the time I just ask myself why you’re really here?

But of course they have made odd decisions before………

Me on Core Finance TV

 

 

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14 thoughts on “Decision day and the Inflation Report arrive at the Bank of England

    • indeed it has always been my posit that the Creative Price Index is deliberately made up of any and all items that are falling or will fall and thus make it a flawed index of inflation – by design

      so again we will have anything paid out to the public using CPI ( bennies) and for certain companies, taxes and HMG pensions the so called “discredited” RPI – or Real Price Index, is used .

      despicable!

      Forbin

      • Forbin, I agree but the irony is that even modest pay rises appear to be above inflation, putting pressure on the BoE to raise rates. Hoist by their own petard, if that’s spelt correctly.

  1. “After all a Brexit deal and a likely stronger Pound £ might mean the Bank of England might raise interest-rates again…”

    Shaun, wouldn’t Carney use a stronger sterling as an excuse to keep rates as they are as he would argue the stronger pound was hurting exporters and raising rates would make matters worse. After all he has a veritable shopping list of excuses not to raise rates, and he likes to mix and match to suit the circumstances at the time.
    It would also appear to me that the second of his mandates after re-flating and maintaining the housing bubble is to keep sterling on its downward path versus other currencies.

    • Hi Kevin

      Your analysis is very much inline with the overall tone of the message from Governor Carney this afternoon at the Inflation Report press conference. Even the FT is losing the faith in their rockstar central banker.

      “Mark Carney is bound to go on about how the BoE might have to raise rates in the event of a disorderly Brexit in the press conference

      (There is a long box in the inflation report saying “this time is different”)

      It isn’t” ( Chris Giles).

      Also if you were making the case for interest-rate rises and in the words of Carly Rae Jepson you ” really really really really really really like” the idea, then you would have put the Budget fiscal expansion in your forecasts. Frankly in City terms there was plenty of time to put them in.

  2. Great analysis, Shaun. So those, whose opinions we should respect, recommend putting up rates and one also wants to reduce the store of QE – just as the economy is cooling, house prices are stagnating or falling, and at the same time that the Fed and ECB are also tightening. I would like to see (slow, gradual) rate rises and think that houses in the South are over valued compared to incomes but, IMO, this timing is more likely to cause a sharp slow down than a soft landing.

    Also, the BBC quote said “London had agreed” to give UK financial services firms access to the EU market. Funny, I thought it was the EU that was reluctant.

    • “..he BBC quote said “London had agreed” to give UK financial services firms access to the EU market….”

      ehehe

      reminds me of the fabled headline – ” Heavy fog in the channel – Europe cut off from Britain ” 😉

      Forbin

  3. Hi Shaun,

    Thanks for the enlightening blog.

    Just curious about what the Czheck economy is doing right? They are in the Eurozone and raised interest rates 4 times in as many Central Bank meetings?

    Binoy.

    • Hi Binoy and welcome to my corner of the web.

      I did look at the Czech National Bank back in April last year and part of my conclusion was this.

      “The central planners fear an uncertain future and have got cold feet. The catch is that they are applying a very strong economic stimulus to an economy which is doing well so the policy is inappropriate also the countries the Czech Republic trades with will have good reason to wonder how much of the economic activity is being poached from them?”

      So I am pleased that they have decided to follow more conventional economic policy since then and raise interest-rates. Whilst the discount rate is only 0.7% higher the 2 week repo is 1.7% higher and the Lombard Rate is some 2.5% higher.

      We do not have the full Minutes but looking at their presentation they are expecting 3% economic growth and inflation heading towards 3% so I was right to be worried back then and they are playing catch-up.

      Oh and they may well join the Euro but are not in it yet,

  4. Hi Shaun

    Carney will most likely never raise rates for the rest of his term here.

    Growth is tepid (with, as you say the monetary data pointing to a marked slowdown); inflation is trending higher but there is little evidence of second round effects and sterling is going nowhere in particular. Brexit is just a convenient excuse to justify doing what they are obviously inclined to do anyway which is to keep rates nailed to the floor. There is too much debt around.

    As Carney sees it putting rates up at this juncture is simply going to exacerbate the weakness in growth and will do little about inflation because that will pass through the system, given the relative quiescence of sterling.

    Although the BOE will use Brexit as a catch all excuse from now on there is a point here. Whatever happens there will be a period of disturbance following Brexit (that is if we do leave the EU which I doubt). However, IMV one of the main risk factors for the British economy is not Brexit; it is the EU. As you said a couple of days ago the EZ growth is tepid and this is certainly not good news and if you add to this the increasing political turbulence in the EU generally it will be a toss up as to who is experiencing the most trouble and my vote is for the EU.

    • Bob, agree with everything you say.Too much Debt to voluntarily raise rates. The Trumpster may force/drag us with their rising lead however. I too doubt Brexit will come to pass and as you say the EU is now cornered with a weak balance, tightening (QT) and unruly countries. Shaun’s video ably describes their hopeless position.Things will get interesting in 2019.

  5. Hi Shaun,
    I see the blog hits have passed the 1.5 million mark. Well done!

    There’s a notice on the wall of one of the local bars that reads “Free Beer Tomorrow”.
    The barman tells me that one or two of his customers truly think they will get a free beer one day.
    It once caused so much trouble he considered removing it.
    For some reason the two words “forward guidance” cross my mind when I see it.
    Strange how the mind works, isn’t it.

    • Hi Eric

      Thank you and I am pleased as I considered it an element of whistling in the dark when I began. If you add in the Mindful Money days and that direct followers are not counted ( 676 according to WordPress) then it is in reality quite a bit more. I am not sure why WordPress count like that but I should not complain as they have provided a good home for this blog overall.
      🙂

  6. Great blog as usual, Shaun.
    Watching the Inflation Report press conference, Carney’s response to a question on central bank independence showed the lengths he will go to ingratiate himself to the Chancellor of the Exchequer. It was especially glaring since the journo asking the question specifically mentioned Trump’s criticism of Chairman Powell’s US Fed raising the federal funds rate. He might have said that central bank independence meant different things in different countries and the Bank of England’s independence was quite constrained compared to other central banks. Chairman Powell could announce a 1.5% inflation target rate next month or abandon inflation targeting altogether. By contrast, Bank of Canada Governor Poloz, Carney’s successor, is bound by the 2016 renewal of the inflation control agreement he negotiated with Finance Minister Morneau, and neither the target rate nor any other important parameters can be changed until a new agreement is negotiated in 2021. But Carney’s response implied that central bank independence inevitably meant the Bank of England Governor accepting his remit on the target rate, the target inflation indicator and so forth, from the Chancellor of the Exchequer. There is nothing inevitable about it at all. It is just the way things have been done since the independence of the Bank of England was established, arguably with more inflationary outcomes than if the Chancellor of the Exchequer could not unilaterally set the framework for monetary policy.

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