HM Treasury has mounted a successful takeover of the Bank of England

We have an opportunity to find out what policymakers at the Bank of England are thinking today especially as the speech I am about to analyse keys with the latest economic news. Sir David Ramsden who prefers to be called Dave has given a speech in Inverness, so let us give him some credit for venturing forth from London. However before we get to the economics there is a systemic problem highlighted by it and him so let’s get straight to it.

when I became Chief Economic Adviser at
the Treasury in 2007.

Let me add to that with this from the Bank of England website.

Before joining the Bank, Dave was Chief Economic Adviser to the Treasury and Head of the Government Economic Service from 2007 – 2017. He was responsible for advising on UK macroeconomic policy and was the Government’s representative of the meetings of the Bank’s Monetary Policy Committee. Previous to that he held a number of civil service roles including leading the Treasury work advising on whether the UK should join the Euro.

Now let me remind us all that the changes in 1997 were supposed to make the Bank of England independent, and what that meant was independent of Her Majesty’s Treasury. As you can see Dave is steeped in it. This is common amongst the Deputy-Governor’s as both Ben Broadbent, Jon Cunliffe and Sam Woods are also alumni of HM Treasury. As you can see independence was a temporary feature which HM Treasury saw as a challenge. This is a big deal when we look at policies like QE which is presented as one body (treasury) being different from the other (central bank ) whereas it is really smoke and mirrors.

The economy


Here is an area where I broadly agree.

Much of the apparent growth in finance sector productivity before the crisis reflected profits on the risky lending that led to the crisis itself. Indeed the way finance sector output is measured meant that the rate of bank balance sheet expansion translated directly into the measured
contribution of the finance sector to productivity growth.

It is rare to see any sort of even implied criticism for “The Precious” so we should welcome this. Also you may note there is also implied criticism of the concept.

The UK manufacturing sector is now much
more productive as a result – but is also smaller.

I do not know if he thinks of it like this but if the sector which is most likely to be productive is getting smaller and being replaced by services there is a clear issue.

Moving to policy we get a clue from this view from Dave who says he expects a lower level of productivity growth than this..

This judgement is embedded in
our Inflation Report forecasts, where we now assume productivity growth of around 1%.

This means that he has a downbeat view on prospects for the UK economy.

Since productivity growth is a key determinant of how fast the economy can sustainably grow –
what I just described as the economy’s “speed limit” – that also means that, all else equal, I am a little more
pessimistic about future GDP growth.


There is a two-way swing here where we get plenty of excuses but the reality is or rather was this.

And GDP turned out to be robust: it has grown by around 1% more than we predicted in August
2016, immediately after the referendum.

However Dave when looking ahead seems to be concentrating on a familiar area, can you spot it?

We have evaluated what effect of a worst case
disorderly scenario, featuring much lower GDP, higher inflation and unemployment and much lower house
prices, would be on the core banking system,

However his view on the problems of unexpected events did get some support from this morning’s release from the UK motor industry or SMMT.

British car manufacturing output plummeted by almost half in April, according to figures published today by the Society of Motor Manufacturers and Traders (SMMT).

70,971 cars rolled off production lines in the month, down -44.5% year on year as factory shutdowns, rescheduled to mitigate against the expected uncertainty of a 29 March Brexit, took effect in many plants across the UK.

That frankly was a shambles after so many promises that March 29th would be the day and yet it went past like any other. the catch of course was that planning was wrong-footed. Some of it will be caught up as we pass the dates where there would have been shut downs anyway but the central issue of a possible exit date remains. This was a clear fail for the UK government.

Labour Market

This has been a very difficult area for the Bank of England as anybody who recalls the original version of Forward Guidance which guided us towards an unemployment rate of 7% being significant for interest-rate increases. How did that go?

Employment growth has remained historically strong, with unemployment falling to 3.8%.

So really rather well for the unemployed and the economy overall. As to increases in interest-rates, not so much, as we in fact started with a cut and have managed in net terms one increase to 0.75%. The claims by Governor Carney that this has not been a debt fuelled boom seem somewhat at odds with this from Deputy-Governor Ramsden.

Consumption has instead been funded, perhaps less
sustainably, by a historically low household saving ratio.

He can’t quite bring himself to say debt can he? Perhaps though he is still chastened by the response to his claim that unsecured credit growth was weak when it was growing at an annual rate of 8.3%.

Also if we reflect on where the speech was given then according to the criteria originally set out for Forward Guidance Scotland should now have interest-rates considerably higher than they are.

And unemployment is at 3.2%, even lower than the already record-breaking UK rate of 3.8%. In the Highland
region it was 3.0% in the most recent data.

Put that in your output gap and smoke it. The Ivory Towers have shown what we might call remarkable intellectual flexibility here. After all the Bank of England has been telling us spare capacity has been “broadly used up” for about five years now.

There was some more welcome news this morning. From the BBC.

The number of low-paid workers dropped by 200,000 last year, with 120,000 of them aged between 21 and 30, the Resolution Foundation said.

It said the introduction of the National Living Wage had “significantly” reduced low pay.


There are several issues here. Let me start with the Treasury one which matters because pretty much everyone I have met from there suffers from being part of what I can only describe as a hive mind. Moving onto interest-rates we see some curious contradictory statements from Deputy-Governor Ramsden. First he is in the raising crew.

Demand,in terms of GDP growth, has exceeded growth in supply such that spare capacity in the economy has been,
broadly speaking, used up. Reflecting that, and its implications for domestic inflationary pressure, the MPC
has raised Bank Rate twice; it now stands at 0.75%.

The cut seems to have been redacted but anyway suddenly we might go in either direction.

There are scenarios where the balance of those factors
would mean looser monetary policy was appropriate, and other scenarios where it would be appropriate to
tighten. In other words the response would not be automatic and could go either way: rates could go up or
down as the situation demands.

The one scenario we do not get is talk outright of a cut which is odd because if you look at the thinking on the speech that looks the most likely outcome.

Me on The Investing Channel

17 thoughts on “HM Treasury has mounted a successful takeover of the Bank of England

  1. Has the B of E ever been truly independent of HM Treasury and HM Government? I don’t think so and it never will, it’s too important to be left to people who might do something sensible.

    I understand that most developed economies have 70-80% made up of service industries, Germany being at the bottom of the scale and UK, France and USA at the top – are these countries also worried about the make up of their economies and productivity (however you message it)

  2. Some excellent points there Shaun, especially about the disconnect between gilt yields and Carney’s warnings that rates may go sooner and faster than people expect, looks like the boy has cried wolf too many times.

  3. Hi Shaun

    Great article as always. WRT to the fall in the car production. Has this been driven by the collapse in sales? Are they trying to avoid a mass of stock on the forecourts? Also as 91% of cars are sold with finance, what the implications for this?


    • Hi anteos

      The number had something of a shock value due to the percentage change but most of this had been pre-announced. For example Mini and Rolls Royce production moved their annual shutdown to the expected Brexit date. So it was more about that.

      As to our production it is mostly for export so the issue is foreign demand not ours.The general issue there is a drop in demand for diesels pretty much everywhere I can think of.

  4. Does anyone listen to what these guys say any more? They only ‘talk their book’ and as their forecasts are invariably wrong , its usually garbage.
    With all the fervent religious b.s. offering ‘ice’ in the sacrificial alter of AGW, is it any wonder that car sales are dropping of a cliff?

    • Hi JimW

      You may not be surprised to note this in the Ramsden speech.

      ” Ecological resilience is becoming increasingly
      prominent as the world comes to terms with the threat from climate change.”

      I hope somebody asked him what his qualifications are in this area?

    • Hi Kit

      That is way beyond my pay grade as I can only recall playing Monopoly in terms of a board game with money. The other board games I can remember playing ( Diplomacy and Risk) had no cash element.

      • I remember playing Totopoly – Waddington’s horse racing board game. Essentially it was betting on the roll of the dice.
        That ought to go down well at the BoE Xmas party.

  5. Great blog as usual, Shaun. Thank you for your commentary on the speech by Dave Ramsden.
    If you look at Chart 4 of Ramsden’s speech on G7 GDP in the financial crisis it is obvious that Canada fared much better than any other G7 country and was the first country to emerge from recovery and start expanding again. There are a number of reasons for this, but one that deserves repeating is that the Bank of Canada was the only G7 central bank that targeted an inflation indicator that included house prices or dwelling prices. It didn’t suffer a housing boom and bust as did the US and the UK and a number of countries that use the euro as their currency whose contractions negatively impacted the French, German and Italian economies. The BoC’s operational guide (i.e. preferred core inflation measure) at the time, CPIX, excluded mortgage interest cost and so its owner-occupied housing component decently approximated one with a net acquisitions approach to OOH. It even more closely approximated the kind of net acquisitions approach that, if I understand correctly, Mario Draghi would be prepared to put up with, since the replacement cost of depreciation component was based on dwelling cost guesstimates and not on house prices. But I digress. Looking ahead a few years, another UK housing boom and bust is understandably not top of mind for Ramsden, but it is strange that he would skate around the most recent of many that his country has suffered through.

    • ” but one that deserves repeating is that the Bank of Canada was the only G7 central bank that targeted an inflation indicator that included house prices or dwelling prices”

      And unfortunately for us we here in the UK are stuck with a Creative Price Index that does not reflect reality …..

      and HMG and BoE have then to pontificate a load of BS to explain things

      probably because despite all the so called efforts nothing has really changed since the 2008 crisis .

      just like Cassandra , Andy , we are doomed to not being believed…….


  6. So.……..

    The BOE warns on asset values and there appears to be a disconnect between high employment and fall in business investment which tend to fall and rise together.

    “The weakness of investment also casts further doubt on how durable the resilience of the labour market has been. Usually, business investment and employment rise and fall together – in aggregate, businesses either increase hiring and investment at the same time, or they cut them both.
    “For businesses to be increasing employment at the same time that they are reducing investment suggests something unusual is going on.”

    If his theory is correct and it probably is employment has probably peaked and unemployment will probably pick up later on, however all depends on what happens to Europeans working in the UK.

    The old adage for shares sell in May and go away was probably the right thing to have done imo I sense trouble ahead with or without a deal on BREXIT.

  7. Hello Shaun,

    ref: “Irish ‘bad bank’ surplus estimate hits $4.45 billion on property surge” Reuters

    well there you go , so who is doubt that the CB and governments are not in collusion and asset prices are all that matter as it “saves” the TBTF Banks …. ( and their chums )


    • Hi Forbin

      There is much that is not quite right about what gets reported about Ireland. Sadly NamaWineLike seems to have gone quiet 6 months ago as it was regularly on the case. From last November.

      ” State-controlled AIB sold loans for 800 borrowers to vulture, Cerberus earlier this year. AIB said it made a €140m profit on the sale. But did it really make a €131m (140-271) loss while tossing borrowers over to a vulture.”

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