The shift towards lower rather than higher interest-rates is beginning again

Yesterday was another poor day for the Forward Guidance provided by central bankers as we note developments in the US and UK. There was a flurry of media activity around the statement from Bank of England Governor that the Chinese Yuan could challenge the US Dollar as the world’s reserve currency, but really he was saying that it is a very long way away. So let us start with the US Federal Reserve and look back to September for its Forward Guidance. From Reuters.

Fed policymakers did not jack up their expectations for rate hikes in coming years, as some analysts had thought, instead sticking closely to rate hike path forecasts outlined in June that envision short-term rates, now at 2.0 percent to 2.25 percent, to be at 3.1 percent by the end of next year.

This suggested a couple of rate hikes in 2019 and at the beginning of December Bill Conerly stepped up the pace in Forbes Magazine.

My forecast for interest rates remains higher than the Fed’s September 2018 forecast. I expect the Fed Funds rate to end 2019 at 3.9%, and to end 2020 at 4.5%.

Bill seemingly had not got the memo about a slowing word and hence US economy as he reflected views which in my opinion were several months out of date as well as being extreme for even then. But what we were seeing was a reining back of forecasts of interest-rate rises. Putting that in theoretical terms the so-called neutral rate of interest showed all the flexibility of the natural rate of unemployment in that it means whatever the central bankers want it to mean.

Last Night events took another turn with the publication of the US Federal Reserve Minutes from December.

With regard to the post meeting statement, members agreed to modify the phrase “the Committee expects that further gradual increases” to read “the Committee judges that some further gradual increases.” The use of the word “judges” in the revised phrase was intended to better convey the data-dependency of the Committee’s decisions regarding the future stance of policy; the reference to “some” further gradual increases was viewed as helping indicate that, based on current information, the Committee judged that a relatively limited amount of additional tightening likely would be appropriate.

As you can see they have chosen the words “judges” and “some” carefully and the prospect of interest-rate increases this year has gone from a peak of 4 with maybe more in 2020 to perhaps none. Or for fans of Carly Rae Jepson it has gone from ” I really,really,really,really” will increase interest-rates to “Call Me Maybe”

Why? Well some may mull the idea of there being a form of Jerome Powell put option for the stock market.

Against this backdrop, U.S. stock prices were down nearly 8 percent on the period.

Widening that out it also reflected an economic weakening which has mostly got worse since.

Forward Guidance

This is supposed to help the ordinary consumer and business(wo)man but letting them know what the central bank plans to do. But to my mind this is of no use at all if they keep getting it wrong as the US Federal Reserve just has. In fact in terms of fixed-rate mortgages and loans they have been given exactly the wrong advice. Whereas we had reflected the changing outlook as I quote from my opening post for this year.

The problem is their starting point and for that all eyes turn to the central banks who have driven them there. Get ready for the claims that “it could not possibly have been expected” and “Surprise!Surprise!”

I find myself debating this on social media with supporters of central bank policy who mostly but not always are central banking alumni. They manage to simultaneously claim that Forward Guidance is useful but it does not matter if it is wrong, which not even the best contortionist could match.

Bank of England

The memo saying “the times they are a-changing” had not reached Bank of England Governor Mark Carney as he posted on the Future Forum yesterday afternoon.

 That’s why the MPC expect that any future increases in Bank Rate are likely to be at a gradual pace and to a limited extent.

He is still hammering away with his hints at higher interest-rates although he was also trying to claim that movements in interest-rates are nothing to do with him at all.

So in other words, low policy interest rates are not the caprice of central bankers, but rather the consequence of powerful global forces.

Makes you wonder why he and his 8 interest-rate setting colleagues are paid  some much if the main events are nothing to do with them doesn’t it? I somehow doubt that when a Bank of England footman handed a copy of Mark Carney’s Gilt-Edged CV to the World Bank that it was claiming that.

Governor Carney was in typical form in other ways too as he answered this question.

In your opinion, how likely is a large spike in Inflation in the near future?

For example in a lengthy answer he used the word inflation once but the word unemployment five times and did not mention inflation prospects/trends ( the question) at all! Better still the things which were apparently “the consequence of powerful global forces.” suddenly became due to his ilk.

Simulations using the Bank’s main forecasting model suggest that the Bank’s monetary policy measures raised the level of GDP by around 8% relative to trend and lowered unemployment by 4 percentage points at their peak. Without this action, real wages would have been 8% lower, or around £2,000 per worker per year, and 1.5 million more people would have been out of work.

As we note his slapping of his own back whilst blowing his own trumpet I zeroed in on the wage growth claim which appeared in another form much later.

Although it’s true that QE helped support asset prices, it also boosted job creation and wage growth.

There is a lot in that sentence but let us start with the wage growth issue. The reality is that real wage growth has been negative in the UK and worse than our economic peers. By propping up zombie banks and companies for example there are reasons to argue that the QE era has made things worse. But apparently in a stroke of magic it has made everything better! Now whilst correlation does not prove causation it is hard to argue you have made things better in a period where you have had a major impact and things have got worse.  Indeed  the more recent trend as the QE flow has slowed has been for wages to pick up.

Also there was the “helped support asset prices” point. This is welcome in its honesty but there have been times that the Bank of England ( in spite of its own research on the subject) has tried to deny this.

What about debt?

Back in 2016 Governor Carney told us.

This is not a debt-fuelled recovery.

Yesterday he changed his tune slightly.

 Recent growth in aggregate credit in the UK has been modest, growing a little faster than nominal GDP.

Notice the shift from real GDP to the invariably higher nominal GDP. Missing in action was any mention of unsecured credit which surged into double-digit annual growth in response to the Sledgehammer QE action of the Bank of England in the autumn of 2016 and is still growing at over 7%. Nor did the surge in student loans merit a mention unlike in this from Geoff Tily of the TUC last week.

Total unsecured debt has risen to £428 billion. At 30.4 per cent of household income, this is higher than before the financial crisis:


There is a fair bit to sweep up here but the main point is that we have developed bodies called independent that do the establishments bidding on a scale politicians themselves would never have got away with. Can you imagine politicians being able to buy trillions of their own debt?! Next we are told that they can help us with the future via Forward Guidance but that when it goes wrong it does not matter. The elastic of credibility just snapped.

In my own country the UK this was added to on LBC Radio where we were grandly told yesterday that someone who used to set UK interest-rates would be on air. When Ian McCafferty came on he seemed confused by the statement that the UK economy grew by 0.6% in the third quarter and sounded out of touch with events. For example in the early part of 2018 it was true that Germany and France were growing more quickly than the UK but as this morning has reminded us to say they are doing so now makes you look out of touch at best.

In November 2018, output slipped back sharply in the manufacturing industry (−1.4% after +1.4% in October) as well as in the whole industry (−1.3% after +1.3%). ( France-Insee ).

Perhaps he will offer a retraction like he had to do when he was on LBC last August. Meanwhile you know I often tell you never to believe anything until it is officially denied don’t you? From Governor Carney yesterday.

We have also made clear that we wouldn’t set negative interest rates – the Bank’s Monetary Policy Committee, which is responsible for setting Bank Rate, has said that the effective lower bound on Bank Rate is close to, but a little above, zero.

As a hint the lower bound was 0.5% until they cut to 0.25% ( and promised a cut to 0.1% in another Forward Guidance failure).







20 thoughts on “The shift towards lower rather than higher interest-rates is beginning again

  1. Shaun

    Industrial production fell in Germany yesterday and today French industrial production fell. A recession looms so said the press yesterday.

    Today its become more evident UK retailers had a poor Christmas consumers are getting more and more worried about the current economic climate.

    I have always indicated it would be wrong to increase BOE rate in a slowing economy and predict the next move to be a cut.

    I am also of the opinion negative interest rates may have to be used. Whether that ir right or not is another complex subject.

    • Yes lower interest rates and more QE will fix things … and if it doesnt they can lower interest rates and have more QE, and if that doesnt work clearly they didnt lower interest rates or print enough money.

      I’m of the opinion they should raise interest rates, let the over-leveraged and zombie companies go bankrupt, and resort back to capitalism.

      But then i’m not one of the people who bought a house prior to the property bubble getting re-inflated due to QE and ZIRP so i’m not big on socialism for asset/debt holders.

      • Arthur,
        I like many others are sick of paying others morgages every month for them with the current ZIRP regime, and then have them brag about how much money they have “made” on their house, but you now have three central bankers just itching to cut rates and/or re-start QE, and that is after ten years during which the ECB never raised rates and Carney just once by a quarter percent – it’s all over – tightening is finished!!!
        I believe Shaun is right here, Carney is going to cut very soon and BREXIT will be the scapegoat, the quarter or the half point cut means nothing in reality but the signal it sends out to the markets is sell the £.

        As rates are so close to zero, it defies belief that Carney won’t go negative.It’s only a matter of time.

        • You are probably right Kevin. They will drag this out as long as they can…. as who would want to be blamed for the price of land becoming affordable to workers on their watch!

          And when it does implode the day of the untouchable central Bwanker will be over.

      • Arthur,

        Its been a very bad day for UK retail today, Marks, Debenhams, Halfords all gave negative news.

        But if people think they cannot trust the government or the BOE this might be interesting.

        John Lewis reported a rise in sales but that was a bit of a deception. Last year the 6 weeks trading for Christmas ended at the 30th December 2017 and if the same dated were used today it would have shown flat sales.

        However this year they decided to provide a trading update with a 7 weeks period to 5 January which meant they were able to declare a rise in sales!

        Not only does the government pick and chose the figures and data to suit it an agenda to mislead company directors are up to the same tricks.

        John Lewis Partnership sales look like they have performed reasonable but when one looks how they have arrived at the data its very misleading. Its all done to portray management performed better than they actually have sales are in fact on track to finish down on the year with only 3 weeks left.

  2. Shaun
    Belated, Happy New Year!
    If there is going to be some sort of Brexit, won’t interest rates have to rise to protect the pound or fall to stimulate the economy?
    To predict UK interest rates over the next few months is going to be nigh on impossible, unless of course your Mike Carney!

    • I think the pound will rise upon leaving the EU, as leaving a protectionist regime will be good for the economy.

      Being able to buy products cheaper from around the world will leave more money in peoples pockets.

      But it will be bad for the Euro as British people will send less money to the Euroland as we’ll be buying goods elsewhere.

  3. I believe that for a number of years growth has been little more than the spending of borrowed money. For this to continue you need lower and lower interest rates in order that borrowers can continue to service debt because most of the debt is not self liquidating. The neutral rate of interest has been in steady decline for years due to mounting debt levels.

    Although negative rates could be said to be just a continuation of this policy by other means it fails to bring out the obvious point that this is not a sustainable policy in the long run; it effectively means bringing forward consumption from tomorrow to today but what happens when tomorrow arrives? People will not suffer negative rates but will withdraw cash and store it. People like Ken Rogoff who are in favour of negative rates also want to ban cash on the wholly specious grounds that cash is used for criminal enterprise – it may be but the reason is to prevent hoarding.

    Negative rates are in my view tantamount to confiscation, a tax by any other name, and would be widely resisted.

    Having blown huge asset bubbles and destroyed pension provision by low rates it seems the economists wish to finish the job of completely destroying the subject of their study.

    • I’m of the opinion that growth has been down to immigration, legal & illegal.
      More of us producing the same amount, and illegals working in the black economy.

      • If we annexed Somalia GDP would grow.. this is effectively what TPTB have done .. but to get the triffic GDP figures that Carney and Hammond spin to the media they’ve printed hundreds of billions to hand out to them (and us) via tax credits and housing benefits to get growth figures near the high echelons of 1-2%.

        I know it may come across as abrupt, but its pretty close to how the economy is ran!

  4. Hello Shaun,

    A while back I asked the question – “so what happens when there’s no growth ? ”

    So here we are a decade later and the TBTF Banks are still bust and with IR so low and that the CB are really signalling for BIRP/ZIRP…….

    fascinating show – like some popcorn ?


  5. Another factor affecting the comfort level for those in personal pension schemes will be receiving their annual statement, which for most will not be looking too good this year.
    ( how fortunate that the most deserving amongst us have managed to keep their guaranteed benefits plans )

    • Hi arrbee

      Thank you as your comment reminded me that I had just got a statement from Lloyds concerning my pension from when I worked for their small business division. It has only gone down a little bit but then it never seemed to go up much in the rallies either.

      They were lifestyling it ( switching into Gilts) a while back and I asked them not to as Gilts are expensive.They ignored me but then had to accept my complaint and paid £25. But since they seem to have just carried on 😦 although currently that may not be all bad……

  6. When the OBR and BoE use sound economic principles they get things right. So when they make predictions using the sectoral balances ie if the state wish to reduce/eliminate it’s deficit then the deficits of the private sector must increase hence we see record debt levels. Raise interest rates and it will all come toppling down. In the absence of an export surplus it is impossible for the private sector and state sector to reduce their deficits at the same time every deficit needs a surplus somewhere.

    I know this is an unpopular opinion on here but the deficit we are currently running is much too low for the support the economy needs, it’s called the paradox of thrift. The state is not a household it’s time to let fiscal policy do it’s job.

    • bill , I don’t kinda disagree . If markets were free then maybe deficit might work – but I think you also mean that we pay the interest on the borrowing from more deficit?



      • We can pay whatever level of interest we want the private sector is crying out for safe assets. You do know that sovereign nations don’t actually borrow don’t you? The purpose of bonds (actually there isn’t one) is to take money out of the economy to prevent overheating. The other way is tax which also does not fund spending. We are sovereign and it’s about time we started acting like it.

  7. Great blog as usual, Shaun.
    I might have mentioned before that when it looked like the Walloons might scupper CETA in 2016, CBC checked their archives to find the last time Wallonia had been mentioned in their reports. It had been when lovely Carly Rae’s song “Call Me Maybe” made it to the top of the Walloon hit parade. Although the unhappy Walloons were appeased and CETA went into effect on a provisional basis last September, according to Wiki only 13 countries, including the UK, have ratified it. And Belgium still is a fly in the ointment: “ In September 2017, Belgium requested the opinion of the European Court of Justice on whether the dispute resolution system of CETA is compatible with EU law. The agreement cannot come into force until the ECJ has given its opinion nor if the ECJ opinion is that CETA is incompatible with EU law.” Negotiations with the EU never seem to go quickly or smoothly.
    In keeping with your theme that the pendulum is switching towards interest rate falls rather than increases, the Bank of Canada announced today it was keeping the overnight rate at 1.75%. The real GDP growth projection for 2018Q4 was scaled back to 1.3% (annualised) from 2.3% in October and the 2018 annual projection from 2.1% to 2.0%. Annual growth for 2019 was scaled back from 2.0% to 1.7%, so it now matches the RBC Capital Economics forecast. Poloz bristled at a reporter’s suggestion that the BoC’s growth forecasts were too optimistic as compared to more realistic private sector forecasts, but his case is weak. In addition to the BoC being late in adopting RBC’s 2019 forecast it is still forecasting a higher growth rate by 0.2 percentage points than RBC for 2018Q4.
    It smacks of boosterism for today’s BoC press release to state that the December jobs report had “a rise of 9,000 jobs_not an extraordinary number, but solid.” In fact, there were 37 thousand fewer employee jobs (a 0.1% decline) in December than in November. The entire growth in jobs in December came from self-employed jobs. These job numbers are up and down like a bride’s nightie, as Thackeray would say, and so are useless for monthly comparisons. Even if this were not so the self-employment jobs are mostly low-paid, precarious and have short hours.
    The consensus seems to be that a move up to a 2.0% and then a 2.25% overnight rate has been delayed rather than denied, but if Canadian growth continues to weaken a case could be made for an interest rate drop instead. Here we are in unexplored territory under NAFTA 0.8. (I don’t know what else to call it. Trump, in a homage to the Village People, calls it You-Ess-Em-See-Eh (USMCA), Poloz prefers Coos-ma (CUSMA), while the French version, l’ l’ACÉUM , also mentions Canada first and Mexico last, never mind how it is said. It’s confusing!) The new tri-national Macroeconomic Committee established by Chapter 33 of the agreement to protect against currency warfare may take a dim view of Poloz trying to lower interest rates, if Powell leaves the Fed’s where they are.

    • Hi Andrew and thanks for the link

      Carly Rae also did a good version of Hold Me at one of the Fleetwood Mac festivals and in an example of life being unpredictable hit the number one heights before Justin Bieber. As to the economy I have just taken a look at the money supply statistics and there seems to have been a bit of a crunch ending in July. Was there a change of some sort last July? Since then the numbers have recovered a bit. I am surprised the Bank of Canada did not mention this as there could be a difficult quarter followed by a return to moderate growth.

      Looking further back they made the interest-rate increases after the money supply surges and in fact waited for the third peak before acting. A really odd decision inn my opinion.

      • Thank you for your reply. The most obvious thing that happened in the Canadian economy in July 2018 would be the retaliatory tariffs against US products launched on July 1, 2018 after the US tariffs on steel and aluminum on June 1. (Our Foreign Affairs Minister, Chrystia Freeland, liked to say “Hope for the best, prepare for the worst”, but she was poorly prepared for this contingency, as it was a pretty long interval between attack and retaliation.) What looked like a looming trade war may have been the signal to the Bank of Canada to loosen up on money supply growth. The Bank of Canada stopped targeting M1 in 1982, and the quarterly MPRs are now virtually a monetary-aggregate-free zone. However, interest in the monetary aggregates has never died out among Canadian economists. The C.D. Howe Institute recently published a study on monetary policy since 2004:
        which recommends the current inflation-targeting regime be supplemented by monitoring a broad monetary aggregate. Maybe you should put your excellent questions to one of its authors, who would likely welcome your insights.

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