What next in terms of interest-rates from the Bank of England?

There is much to engage the Bank of England at this time. There is the pretty much world wide manufacturing recession that affected the UK as shown below in the latest data.

The three-monthly fall in manufacturing of 1.1% is because of widespread weakness with 11 of the 13 subsectors decreasing; this was led by food, beverages and tobacco (2.0%) and computer, electronic and optical products (3.5%).

The recent declines have in fact reminded us that if all the monetary easing was for manufacturing it has not worked because it was at 105.1 at the previous peak in February 2018 ( 2015 = 100) as opposed to 101.4 this August if we look at a rolling three monthly measure. Or to put it another way we have seen a long-lasting depression just deepen again.

Also at the end of last week there was quite a bounce back by the value of the UK Pound £. Much of that has remained so far this morning as we are at 1.142 versus the Euro. Unfortunately the Bank of England has been somewhat tardy in updating its effective exchange rate index but using its old rule of thumb I estimate that the move was equivalent to a 0.75% rise in interest-rates. Actually there was another influence as the Gilt market fell at the same time with the ten-year yield rising to 0.7% on Friday.

Enter Dave Ramsden

I note that Sir David Ramsden CBE is now Dave but more important for me is the way that like all Deputy Governors these days he is a HM Treasury alumni.

Before joining the Bank, Dave was Chief Economic Adviser to the Treasury and Head of the Government Economic Service from 2007 – 2017.

On a conceptual level there seems little point in making the Bank of England independent from the Treasury and then filling it with Treasury insiders. So the word independent needs to be in my financial lexicon for these times.

However Dave is in the news because he has been interviewed by the Daily Telegraph. So let us examine what he has said.

The UK’s “speed limit” for growth has been so damaged by uncertainty over Brexit that it could hamper the Bank of England’s ability to help a weak economy with lower interest rates, deputy Governor Sir Dave Ramsden warned today.

There are several issues raised already. For example the “speed limit” follows quite a few failures for the Bank of England Ivory Tower, There was the output gap failure and the Phillips Curve but all pale into insignificance compared to the unemployment rate where 4.25% is the new 7%. As to the “speed limit” of 1.5% for GDP growth then as we were at 1.3% at the end of the second quarter in spite of the quarterly decline of 0.2% seen Dave seems to be whistling in the wind a bit.

Also the issue of the Bank of England helping the economy with lower interest-rates has two issues. The first is that interest-rates were slashed but we are where we are. Next the responsibility for Bank Rate being at 0.75% is of course with Dave and his colleagues. That is also inconsistent with the claims of Governor Mark Carney that the 0.25% interest-rate cut and Sledgehammer QE of August 2016 saved 250,000 jobs.

Productivity

Dave’s main concern was this.

He said he was more cautious over the economy’s growth potential thanks to consistent disappointments on productivity, which sank at its fastest pace for five years in the three months to June.

For those who have not seen the official data here it is.

Labour productivity, as measured on an output per hour basis, fell by 0.5% compared with Quarter 2 (Apr to June) 2018. This follows two consecutive quarters of zero growth.

The problem with this type of thinking is that it ignores the switch to services which has been taking place for decades as they are areas where productivity is often hard to measure and sometimes you would not want at all. After my knee operation I had some 30 minute physio sessions and would not have been pleased if I was paying the same amount for twenty minutes!

Next comes the issue of the present contraction in manufacturing which will be making productivity worse. This is before we get to the issue that some of the claimed productivity gains pre credit crunch were an illusion as the banking sector inflated rather than grew.

Wages

Dave does not seem to be especially keen on the improvement in wage growth that has seen it rise to an annual rate of above 4%.

The critical economic ingredient has lagged since the crisis as businesses cut back investment spending, dampening the UK’s ability to produce more, fund sustainable pay rises and be internationally competitive. Company wage costs “are picking up quite significantly, which will drive domestic inflationary pressure”, he added.

Not much fun there for those whose real wages are still below the previous peak.We get dome further thoughts via the usual buzz phrase bingo central bankers so love.

From my perspective, I also think spare capacity might not have opened up that much despite that weakness in underlying growth, because I think supply potential, the speed limit of the economy, is also slowing through this period. That comes through for me pretty clearly in the latest productivity numbers.

News of the Ivory Tower theoretical conceptual failure does not seem to have arrived at Dave’s door.

Policy Prescription

In a world of “entrenched uncertainty” – a likely temporary extension to the UK’s membership if the Prime Minister complies with the Benn Act – “I see less of a case for a more accommodative monetary position,” Sir Dave said.

Also taking him away from an interest-rate cut was this.

Sir Dave – who refused to comment on whether he had applied to replace outgoing Governor Mark Carney – said the MPC would also have to take account of the recent £13.4bn surge in public spending unveiled by Chancellor Sajid Javid in last month’s spending review. The Bank estimates that will add 0.4 percentage point to growth.

Comment

In the past Dave has tried to make it look as though he is an expert in financial markets perhaps in an attempt to justify his role as Deputy Governor for that area. Unfortunately for him that has gone rather awry. If he looked at the rise in the UK ten-year Gilt yield form 0.45% to 0.71% at the end of last week or the three point fall in the Gilt future Fave may have thought that his speech would be well timed. Sadly for him that has gone all wrong this morning as the Gilt market has U-Turned and as the Gilt future has rallied a point the ten-year yield has fallen to 0.62%

So it would appear he may even have negative credibility in the markets. Perhaps they have picked up on the tendency of Bank of England policymakers to vote in a “I agree with Mark ( Carney)” fashion. His credibility took quite a knock back in May 2016 when he described consumer credit growth of 8.6% like this.

Bank Of England’s Ramsden Says Weak Consumer Credit Data Was Another Factor That Made Me Fear UK Consumption Growth Could Slow Further, Need To Wait And See ( @LiveSquawk )

In terms of PR though should Sir Dave vote for an interest-rate cut he can present it as something he did not want to do. After all so much central banking policy making comes down to PR these days.

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16 thoughts on “What next in terms of interest-rates from the Bank of England?

  1. Shaun,

    As I have only a simplistic understanding of economics I would be interested to understand how you arrive at the £ boost last Friday and it equated to a interest rise of 0.75% ?

    As for some of the other points you made in todays blog, low interest rates may not have made much difference to manufacturing but they may have contributed to the service sector and retail sales, don’t you think?

    If you accept the above even lower interest rates could prevent any further damage through BREXIT !

    As for Dave’s comments below:
    The UK’s “speed limit” for growth has been so damaged by uncertainty over Brexit that it could hamper the Bank of England’s ability to help a weak economy with lower interest rates, deputy Governor Sir Dave Ramsden warned today.”

    Question:

    Is he saying this to bolster the £ or warning there will be no cuts?

    He says the UK speed limit for growth been so badly damaged, but haven’t we done better than Europe in any event which does seem to be at odds with the facts?

    Certainly German manufacturing is causing considerable damage to their economy due to its reliance on manufacturing and has forced Europe to go negative on interest rates!

    Having read Dave’s comments and what is going on in the real world, I don’t believe for one minute UK interest rates will rise and still more chance of them falling and the market doesn’t either the £ has fallen today.

    The way I look at the situation is if interest rates fall further the UK public will spend more and as the service sector is reliant on services the UK will perform better.

    I appreciate debt will go up and at some time this will have to be paid back but it is a new world of economics out there in cheap borrowing.

    • Hi Peter

      There was a Bank of England rule of thumb which equated movements in its effective ( trade-weighted) index for the £ with official interest-rate moves. I am not the only one who recalls it but there are not so many as for example Danny Blanchflower asked about it on Friday.

      As to lower interest-rates boosting some parts of the economy then it presumably boosted car sales for a while although of course there is the fact that the supply of credit was boosted ( FLS. TFS etc…). If the lower bound is 0.1% then any cuts now will be dwarfed but what happened before/

      It is an interesting idea that Dave may have been trying to boost the £. So far that has not really been his thing so it would be a change. But it did not have much effect as financial markets have the same view as you expressed on it.

  2. I will let Shaun answer your questions as I am not an economist either!

    With regards to your comment about interest rates falling and people spending more – I’m not sure that it works like that. We are often told that savers outnumber borrowers and as interest rates have declined so as income from savings. This cuts discretionary spending which helps the service sector. Those without savings spend on credit cards and the interest charged on them is still very high and will probably stay that way. I wonder if any of the central bankers have ever considered the alternative of raising rates so that folk get a positive return and will start spending more? I doubt it,

    • I think rates are set to be competition with other CB ‘s in some respects. I have to wonder why they keep on about local conditions for each country with a CB as they do not appear to take any notice or heed of them .

      The Great Game is being played out at these levels

      Will the BoE raise rates ? why ? they are the best at Masterly Inaction !

      Forbin

      • Indeed Forbin, the liquidty issues in the US are largely born our of a reining in of the currency insurance tools. There were massive flows of dollars to buy US treasuries for the incrementally better return (say 2.25%) over the -ve rates in bonds in Europe. This carry trade stopped a few months ago when support for the currency risk was cut-back. Now the small percentage gain is not offset by the currency volatility.

        Suddenly there arent enough dollars.

        Oh and this was an example of money chasing around the world for interest rates set by CB’s.

        Paul C.

    • Pavlaki

      They do say that savers outnumber borrowers that is correct. But wasn’t the reason for the rise in buy-to let because more yield could be obtained than on deposit?

      But let me tell you another experience I have had lately. Lowry signed limited edition prints are in demand and recently £20,000 was paid for “going to the match” and near £8,000 for “Man on a Wall”. Well I know a signed limited edition of “Man on the Wall was sold for less than £150 just before Lowry’s death in 1976 the rise in the prints beaten inflation and in some cases beaten property prices hands down and that is a fact. Lowry Prints are in demand!

      https://notayesmanseconomics.wordpress.com/2019/10/14/what-next-in-terms-of-interest-rates-from-the-bank-of-england/#comments

      To put it in context £150 in 1975 would be worth about £1,500 using the MAIL RPI inflation calculator. The rise in the print is more than 4 times the retail price index!

      So overall I have to disagree with your views, I think low interest rates and negative interest rates will boost the economy, the largest part the economy the service sector. There is no point saving money if it is to be eroded.

      • I agree they will boost the economy – one way is to allow more debt on a re-mortgage or equity release schemes …..

        worked in the past , umm , frankly have we reached the stage to get as much cash as possible for one last party , or horde gold ??

        Forbin

        • forbin,

          I think we are singing from the same hymn sheet we both agree cutting rates and negative rates would boost the economy, however all it will also do is delay the date the house of cards collapse, as debt cannot keep climbing forever.

          In the meantime Danny Blanchflower latest thoughts are to revamp the BOE as he claims to know what is needed at the BOE and he claims to have been the “lone voice” in predicting the last recession.
          https://www.bloomberg.com/news/articles/2019-10-13/revamp-boe-or-yield-to-tyranny-of-consensus-blanchflower-says

          Maybe however as Shaun mentioned last week in reply to my post Gillian Tett and many others could see a financial crash before it happened. Just because he foresaw the last recession doesn’t mean he has the right economic solution going forward.

          Dyson has proved to be one of the worlds best developers in vacuums but his ambition to be in the forefront of electric cars has flopped.

          I appreciate the two examples above completely different but the people who tend to claim they were right on past thinking can tend to blow their own trumpets at times and the world should listen to them in future-Danny Blanchflower is very good at that!

          • sorry this is posted late but

            I thought that the expression was that success had a thousand fathers and failure was a real ba**ard.

      • But we have had low rates for years now and it doesn’t seem to be working! I also don’t believe rates can go much lower. If current interest rates do not boost the economy then another 0.25 or 0.5% cut is not going to make any difference!
        It tends to be human nature that we draw our horns in when times are tough rather then splurge because it will be eroded. I can vouch for the fact that I and many friends are doing just that when in the past we had income from savings to spend. The tougher they make it, the less we will spend.

      • You’d think so, but…
        …it is an observed fact that when savings rates go down, so does savers’ spending. Its one of those counter-intuitive behaviours that (should) make economics more than just arithmetic.

  3. The answer to the question posed by the title is all too predictable for regulars on here, only the timing of the next cut is up for question.

    Carney will have been alarmed at the recent rise in sterling, this and the housing market will greatly influence his decision as to when to announce the next cut and the re-starting of QE – oh sorry “NOTQE” – means it seems to be now unacceptable to call repeats of failed policies the same name, a new name means it will be “different this time”.

    In terms of monetary policy I believe we are literally a coin toss away from the next policy decision leading to either a deflationary collapse or an inflationary supernova that will result in the collapse of most of the major fiat currencies, my soon to be worthless £ are on the latter.

    I think something is going to happen soon as a story told to me by a work colleague gave a valuable insight into the the UK consumer and his spending power. Two of his friends started a secondhand car business around ten years ago selling high end cars from a rented “executive property”, their stock was around 70-80 cars at any one time. About eighteen months ago things started to get a bit difficult, so they moved to selling the cars from an industrial unit to cut costs, and recently decided to close the business as they were losing money. Their outgoings were £20-25,000 a month, the bulk of which was to Autotrader for advertising, their initial £100,000 investment grew to about £1m, but now is almost all gone.It may be dangerous to draw conclusions from such a story but I think this is an accurate barometer for the over indebted average UK consumer, who has followed the policies of the Bank of England and lived the champagne lifestyle on beer wages to the max and is now either unable or unwilling to continue spending money he hasn’t got.

    I like many others on here will have been looking forward to the day these people get their just deserts, but any schadenfreude will be tempered by the knowledge that the Bank of England will be throwing us over the cliff along with them along with our savings and pensions.

    • there is certainly something about the 18 month mark a year ago

      that’s when I noticed here in sunny Surrey ( tipping down at the mo! ) that house prices peaked , they are on the way down , about still 10% but nothing seems to be moving .

      local restaurants seem to be patchy too , VFM places are doing well but the higher end is struggling , one steak house I went to was washing up at 09:45 when normally it would still be serving customers – we were the last the leave at 09:45 !

      I think the BoE have missed the mark and it’s not all Brexit – if it ever happens ….

      Anyone else seen signs of economic stress?

      Forbin

      • forbin,

        Where I am up north the opposite is happening average house prices seem to be going up and the north catching up!

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