Has the Bank of England forgotten about its currency reserves?

We are in the season for a raft of UK economic data although at the moment markets are being driven by Brexit developments, or rather the apparent lack of them. One consequence of this was a nearly 2 cent fall versus the US Dollar to below US $1.26 and around a 1 cent fall versus the Euro to below 1.11. I await the exact numbers on the change in the trade weighted or effective exchange rate index but the move was such that we saw something that under the old rule of thumb was equivalent to a 0.25% Bank Rate cut. That reminded me of this from early April ( no not the 1st…) 2016 in City AM.

Britain’s foreign currency reserves reached a new record high last month, passing $100bn (£70.5bn) for the first time, as the UK looks to be building a buffer to defend the pound against the prospect of a currency crisis ahead of the EU referendum.


Another $4.5bn in reserves was acquired in March, taking the total amount held to $104.2bn and fuelling speculation that the Treasury and Threadneedle Street are getting their ducks in a row to deal with wild swings in the value of sterling around the time of the referendum.

Actually the Bank of England has been building up its foreign exchange reserves in the credit crunch era and as of the end of October they amounted to US $115.8 billion as opposed as opposed to dips towards US $35 billion in 2009. So as the UK Pound £ has fallen we see that our own central bank has been on the other side of the ledger with a particular acceleration in 2015. I will leave readers to their own thoughts as to whether that has been sensible management or has weighed on the UK Pound £ or of course both?!

But my fundamental point is to enquire as to under what circumstances would the Bank of England intervene to support the currency? This is what it is officially for.

The EEA was established in 1932 to provide a fund which could be used for “checking undue fluctuations in the exchange value of sterling”.

This, in my opinion could not contrast much more with the UK Gilt market which has surged due to expectations, or fears if you prefer of more QE bond buying from the Bank of England. It does not get reported much but the UK ten-year Gilt now yields a mere 1.24%.

Labour Market


Yesterday our official statistician’s produced some research which backed up a long-running theme of my work.

Productivity gap narrows

As a reminder I wrote this back on January 18th on the subject.

I have regularly argued that it is very likely we have miss measured productivity and therefore the crisis will to some extent fade away……..If we go back to the peak headlines where for example the Bank of England argued we were some 19% below where we would have been projecting pre crisis trends we are left wondering how much is due to miss measurement?

Or in musical terms we need some Imagination

Could it be that it’s just an illusion
Putting me back in all this confusion
Could it be that it’s just an illusion now?

That was partly in response to some new work by Diane Coyle suggesting that the telecoms sector had in fact seen more growth than the official statistics recorded. Regular readers will not be surprised to learn that the official response was a somewhat woeful tweaking of the numbers to give basically the same answer as before,

But now there has been a new development.

Historically each country has used the best data available to it, but the OECD’s working paper shows that, when using a more consistent method to compare total hours worked, the UK’s labour productivity improves significantly relative to other countries. For example, the UK’s productivity gap with the US would reduce by about 8 percentage points from 24% to 16% when adopting the simple component method approach.

I do not know about you but when I compare numbers I always look to do them on as “like for like” basis as possible and find it not a little breathtaking that this has not been done before. But the good news is that it has now.

Not everyone’s numbers improve as for example Greece sadly gains little. Oh and if I was looking at these numbers I would be thinking of words like “offshoring” and phrases like “Gross National Product” about the stellar performances of Luxembourg and Ireland.

A clear signal was of course given earlier this year by the Office of Budget Responsibility going bearish on productivity trends.

Good news on wages

Here we go.

Latest estimates show that average weekly earnings for employees in Great Britain in nominal terms (that is, not adjusted for price inflation) increased by 3.3%, both excluding and including bonuses, compared with a year earlier.

As we welcome this let us take the rare opportunity to congratulate the Bank of England on beginning to look correct. After all this has come after many years of pain for it. The official view tells us this about real wages.

Latest estimates show that average weekly earnings for employees in Great Britain in real terms (that is, adjusted for price inflation) increased by 1.0% excluding bonuses, and by 1.1% including bonuses, compared with a year earlier.

The catch is that the number above relies on an inflation number called CPIH which is dragged lower by the use of Imputed Rents. If we switch to the previous measure CPI real wage growth falls to 0.7% or so as the depressing influence of Imputed Rents falls out of the data. If we use RPI then rather than real wage growth we find that it is at least no longer falling. Can anybody think why the establishment does not like the RPI measure? Apart from when it is used in their own defined benefit pensions I mean.

The numbers for October on its own provided some further cheer as at 3.9% it even exceeded RPI by 0.6% as the numbers were pulled higher by the service sector (4.2%).

Employment continues to grow as well.

There were an estimated 32.48 million people in work, 79,000 more than for May to July 2018 and 396,000 more than for a year earlier.

Not so good was the rise in unemployment for men of 27,000 and I am putting it like that as female unemployment fell by 7,000. It was due to a shift out of the inactivity sector so we will have to wait to see what it really means.


There is a lot to consider right now but let us remind ourselves that producers of official statistics need to consume a slice of humble pie every now and then. Yesterday saw two clear examples of this with the large revision to UK trade especially ( surprise,suprise ) for the services sector and then a solid chunk of the productivity gap faded away. Or rather the perceived productivity gap. The latter had been on my mind Sunday evening because as I went for a run around Battersea Park after 8 pm and noted the shop selling Christmas trees was still open. Great for consumers but bad for one way at least of measuring productivity.

But left me leave you with the question of the day. When would Mark Carney and the Bank of England actually use our currency reserves?




13 thoughts on “Has the Bank of England forgotten about its currency reserves?

  1. When? When he has been told to by his superiors or when it has lost so much against other currencies as to be too little too late. Of course, by building these reserves, the Bank of England has technically been selling sterling to buy them, helping to drive it down even further, in the supposed scenario of buying it later to help support it!!!.

    A bit like central banks also raising rates so they can cut them later – you can’t fault logic like that can you?

    The main aim is to prevent BREXIT, and should it go ahead in any form other than the Remain agreement currently waved around in Chamberlain style by Treason May, the pound will be attacked mercilessly on the forex markets with Carney sitting on his hands until the pressure on politicians beomes so great they will capitulate and rejoin in another sellout.

    My long term prediction of a financial crisis so severe that means we have to ditch the pound and adopt the Euro is looking more and more likely as this farce unravels

    The secret weapon of a general election letting in Labour of course is the final nuclear option but will be deployed if necessary IMHO.

    There has to be consequences for all the QE and zero interest rates that have been used to bail out the banking sector and the housing market over the last ten years, and I think over the coming years this country is going to pay for all that “wealth” created in the housing sector with a massively depreciated currency that will wipe out most of the gains when translated into foreign currency and also runaway inflation.

    This time don’t expect the Bank of England to try and stop either the currency collapse or the inflation, or unions to protect their members with wage increases linked to inflation lke they did in the seventies and early eighties.

  2. “When would Mark Carney and the Bank of England actually use our currency reserves?”

    I think Mr Mathis has the answer…

    ( apologies if this includes Google’s protect-our-copyright-scam notice )

  3. Yes, the BBC is in full propaganda mode basically copying and pasting treasury press releases. I wonder how many people are reading, taking a look around and wondering what country they’re talking about? Everywhere I go I meet just about managing and terrified that one single event such as illness or redundency will ruin them. I’m sure they’re all delighted the BoE have built up their reserves though. Whatever happened to the post war social contract, I miss it.

    The vow that we made
    You broke it in two
    But that don’t stop me from loving you

    I can’t stand up for falling down
    I can’t stand up for falling down

    • Bill, I totally agree with what you say about the BBC, it infuriates me that no one asks questions or does any research before interviews.
      re your comment on people just about managing – I would be interested to know where this is ( and I mean this in the nicest possible way as I am curious about how different areas of the country are being affected)? I have just returned from a week on Tyneside where you would expect to see a real tightening of the belt however what I saw was very much to the contrary ( not to say that it doesnt exist in pockets but i saw an overall view). We tried to get in to various pubs and restaurants around the area during weekdays but most were full and booked well ahead. People were shopping in Newcastle and in Gateshead at the Metro Centre like the Russians were on the other side of the chanel . I visited Ashington, which has to be one of the most deprived towns in the country but even there the pubs were busy. I found this surprising but also quite encouraging and people were not downbeat at all. Mind it takes a lot to make Geordies miserable!

  4. Hi Shaun, thank you for your observation. I think the delay to the meanginful vote is an excellent precursor for the fireworks and negotiation finale cum brinksmanship which is Brexit. I can’t but worry that this is the most expensive time to buy currency but I guess there is a yong and yang here, they sell “worthless” gilts of a soon to be failed state to naiive foriegn buyers.

    Maybot wans to hold her leadership to the bitter end, no one will wrest her from her precious deal, search for: andy serkis brexit parody gollum

    So Circus Carney will plan to use the money around the 29th March, because Maybot will still be holding out for some crumbs from Europe (she calls this negotiation). The markets will however call time earlier in the month of March, our illustrious Leader will be looking something like this when the curtains fall. http://dontpaniconline.com/magazine/radar/theresa-may-a-divorced-dad-begging-the-left-for-forgiveness

    Returning to economics ever so briefly… the money will last about 2 days before he raises rates to 6%. And there endeth our “wealth”

  5. Great blog as usual, Shaun.
    You write: “The catch [with the estimated 1.1% annual increase in real wages based on total pay for August-to-October 2018] is is that the number above relies on an inflation number called CPIH which is dragged lower by the use of Imputed Rents. If we switch to the previous measure CPI real wage growth falls to 0.7% or so as the depressing influence of Imputed Rents falls out of the data. If we use RPI then rather than real wage growth we find that it is at least no longer falling.” I could not duplicate the ONS result in a spreadsheet using CPIH as the deflator. The ONS database doesn’t provide floating point numbers so there is a fair degree of rounding error in the calculation. The real wage inflation rates I got were: 0.9% using CPIH, 0.7% using CPI (as you thought), 0.5% using RPIJ and -0.1% (actually -0.15%) using the RPI. Given the rounding error involved the latter estimate may well be compatible with your statement about real wages at least no longer falling with an RPI deflator. In any case, the formula effect (difference between the RPI and RPIJ inflation rates) varies between 0.6% and 0.8% for the August to October annual inflation rates, which is an acceptable measure, to me at least, of upward bias in the RPI inflation rate, so real wage growth really does seem to have been quite impressively positive lately. I would also take the 0.4 percentage point difference between the official real wage increase and the one based on RPIJ as the best measure available for now as to the upward bias associated with using the CPIH as the deflator. This was a terrible policy move that should never have been made. Which is going to happen first do you think: the ONS starts deflating nominal wages with its HCI or Eurostat incorporates an OOHPI component in its HICP?

    • Shaun, if one excludes bonuses, the results are similar. I get real wage growth with deflation of nominal wages using CPIH of 0.9% (versus 1.0% published), using CPI of 0.7%, using RPIJ of 0.5% and using RPI of -0.1%. Again the most reasonable estimate would seem to be the one using RPIJ as the deflator.

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