Why Minouche Shafik would be a bad choice as Bank of England Governor

The appointment of the next Governor of the Bank of England has become quite a merry-go-round. It reminds me rather of the Grand National at Aintree where we see many horses take the lead in the race but very few survive. This morning’s suggestion was even by these standards something of a surprise so let me hand you over to Simon Jack of the BBC.

NEW: told that Minouche Shafik is THIS govt’s preferred candidate for next Bank of England Governor. No announcement this side of election – cos it would be “politically messy” but if (a big if) this government secures majority – Egyptian born Minouche is current favourite.

For newer readers the surprise element comes from her past track record on the Monetary Policy Committee but two other issues are raised so let me address them. The first I have done so already on Twitter.

Just so I am not misunderstood having a woman as Bank of England Governor is a good idea but sticking to past policymakers the competent and intelligent Kristin Forbes would be much better than the incompetent Shafik,

Next is the issue of her nationality as the Bank of England has developed a habit of only employing women from abroad for such roles. This is an issue I raised when she was first appointed to the MPC as I found myself being criticised by @ToryTreasury which described her as British. They went rather quiet though when I quoted her describing herself as Egyptian and asked if they thought she knew better than they did? But both Kristin Forbes and the present Silvano Tenreryo were and are from abroad. I have no issue with appointing some from abroad but the occasional British woman would not go amiss! Also should they appoint a British woman perhaps they could look a little wider than they did last time. From Wiki.

The Hon Charlotte Hogg was born on 26 August 1970 in London, England. Both her parents hold peerages in their own right: her father is the 3rd Viscount Hailsham, a former Member of Parliament and hereditary peer as well as being a life peer, and her mother is the Baroness Hogg, a life peer . She was brought up on the family estate of Kettlethorpe Hall in Kettlethorpe, Lincolnshire.

Monetary Policy

If we step back in time to the 28th of September 2016 Minouche Shafik gave a speech at Bloomberg.

the process of adjustment can sometimes be painful. That’s where monetary policy can help, and it seems likely to me that further monetary stimulus will be required at some point in order to help ensure that a slowdown in economic activity doesn’t turn into something more pernicious.

As I pointed out the next day this was a case of toeing the Governor Carney line. As I  had pointed out 2 weekend’s  before on BBC Radio 4’s Money Box the simple fact was that the fall in the UK Pound £ was a much bigger factor for the UK economy than the Bank of England moves. As of the latest update on our effective or trade weighted exchange rate back then we had received the equivalent of a 2.5% cut in Bank Rate or as I put it on the radio a “Bazooka” compared to the “peashooter” she and her colleagues deployed with a 0.25% cut. The £60 billion of QE was pretty much been offset by a rise in pension fund deficits and the Corporate Bond QE seems to be as much for foreign firms as UK ones.

She in fact highlighted the problem herself but rather oddly chose to ignore it with her policy prescription above.

For example, Bank staff have revised up their forecast for the mature estimate of GDP growth in Q3 to 0.3% from 0.1% at the time of the August Inflation Report.

So thing’s are better but the prescription is the same! Even worse she was unable to grasp that the situation she described was ( and still is ) part of the problem.

What is unusual about this particular loosening relative to previous cycles is its starting point. Despite many real economic variables having returned to around normal levels following the financial crisis the absence of any signs of overheating or inflationary pressure meant that at the time of the referendum Bank Rate was already at an all-time low of 0.5% and we held a stock of £375bn gilts on our balance sheet.

As to “any signs of overheating” she missed this as I pointed out.

UK broad money, M4ex, is defined as M4 excluding intermediate other financial corporations (OFCs)……The three-month annualised and twelve-month growth rates were 10.9% and 7.3% respectively.

Oh and something else was red-lining too.

Consumer credit increased by £1.6 billion in August, broadly in line with the average over the previous six months. The three-month annualised and twelve-month growth rates were 10.4% and 10.3% respectively.

In fact in spite of the fact that the estimates for GDP growth had been revised up Minouche could nor resist this.

Asked by Bloomberg Editor-in-Chief John Micklethwait if there was any positive impact from Brexit, Shafik paused. Her offering? The sunny summer enjoyed by Britain.

“The weather’s been really good since the referendum,” she told the audience at the Bloomberg Markets Most Influential Summit in London.

Time passes and it is easy to forget. But this was part of warming the UK up or giving Forward Guidance for a further Bank Rate cut to 0.1% and yet more QE in November. This did not happen because by then it was obvious even to those trying to turn a blind eye to it that the economic situation has been completely misread by the Bank of England. Those policy moves went into the recycling bin.

In an unusual development if we read between the lines it looks as though even the Financial Times agrees with me. This below from economics editor Chris Giles is some distance from the “rock star central banker” that Mark Carney was welcomed with.

With today’s perfectly reasonable BBC speculation that Minouche Shafik is a front runner for ⁦@bankofengland

⁩ governor, I am reminded how difficult it was to extract a clear view from her in an interview when deputy governor.

The latter sentence evokes memories of how Yes Prime Minister described such matters.

Doesn’t it surprise you? – Not with Sir Desmond Glazebrook as chairman.

– How on earth did he become chairman? He never has any original ideas, never takes a stand on principle.

As he doesn’t understand anything, he agrees with everybody and so people think he’s sound.

Is that why I’ve been invited to consult him about this governorship?

 

Comment

The situation is that we have had something of a litany of front-runners. This government is supposed to have favoured Gerard Lyons and Dame Helena Morrisey and Andrew Bailey was supposed to be a shoe-in before that. So the Shafik Surprise may quickly fade in the way she was moved out of the MPC to my alma mater the LSE. For these purposes I have ignored the rubbish she spoke about QE because pretty much everyone at the Bank of England quotes that and back in September 2016 she did perhaps inadvertently get something right.

BOE SHAFIKQE UNWIND DOES LOOK A VERY LONG WAY AWAY

Ever further away as we mull whether we will get weekly, then daily then hourly extensions of the term of Governor Carney?

 

14 thoughts on “Why Minouche Shafik would be a bad choice as Bank of England Governor

    • Hi Forbin

      There would be some entertainment should people remind her that the criteria she set for interest-rate rises was higher wage growth. As we now have it I guess we would see some “innovation” in her views.

  1. Great article Shaun. Here is my job spec for the next candidate:

    1. Must be able to ‘look through’ inflation
    2. Must be able to keep the housing bubble inflated
    3. Must be ready to press the ‘Print Money’ button on the money printing machine when instructed
    4. Must be unable to pull the ‘increase interest rates’ lever
    5. Must be able constantly talk down the pound
    6. Must be able to hold countless meetings whilst achieving very ittle

    Preferable Skills
    1. Be unnacountable.
    2. Have no conscience about keeping the population oppressed via ZIRP, high debt and inflation.

    Whoever gets in, I’m sure they’ll meet the requirements with some aplomb.

    • Excellent, saved me having to write it! Certainly explains the delay in appointing someone as they have to agree to all the above before getting the job.

    • Damm , I could do all of that , and for cheaper too !

      where can I apply ?

      Forbin

      PS: I could even write them an API that does that 😉 ……

  2. Great blog as usual, Shaun.
    Stephen Poloz’s term as Governor of the Bank of Canada will also expire within a year (he came into office in June 2013) and from his performance on October 30 with the presentation of the October Monetary Policy Report he seems to be lobbying hard for a second term. However brief the new Trudeau government lasts it will almost certainly be around to choose the next Governor, and Poloz would be eligible for a second seven-year term.
    The day of the MPR release Governor Poloz was interviewed by Amanda Lang of Bloomberg:
    https://www.bnnbloomberg.ca/poloz-still-bullish-on-canada-amid-haphazard-trade-war-1.1340175
    Asked a general question about fiscal policy his response is clearly partisan: “And so fortunately you know here in Canada we had fiscal support over the last four years [i.e. for the first term of the Trudeau government]. That support, which I spoke about in a speech in February, saved us about 100 basis points of further monetary easing.” This calculation, from what he says afterwards seems to be based on the assumption that CAN$5B (about £2.9B) of fiscal stimulus is equivalent to a 25 basis point rate cut. Without discussing the merits of Poloz’s position, the inappropriateness of a central bank governor acting as cheerleader for the current government’s fiscal policy should be obvious. I should point out though that the fiscal policy adopted was quite different from what the Liberals promised in the 2015 election campaign and early in their term. The $1B surplus we were promised for the current fiscal year was most recently forecast by the PBO as a $20.9B deficit, and it is likely this will balloon above $25B when the year is out and we have an actual estimate.
    Poloz also seems to have happily accepted a role as a subordinate in Commander Trudeau’s Global Anti-Trump Resistance Army. In the interview he says: “We’ve been exposed to this trade war ever since Trump was elected. We were first.” The same kind of language can be found in Poloz’s opening statement at the press conference. While technically Poloz is probably right and the anti-subsidy tariffs the Trump administration announced on Canadian softwood lumber imports in April 2017 were the new government’s first important trade action, a similar move would likely have been taken by a Hillary Clinton government. The softwood lumber agreement that the Conservative government negotiated with the Americans expired in October 2015, with a one-year period that followed during which no party could engage in trade actions against the other. However, It is odd that the world’s most famous blackface hobbyist didn’t make a more serious effort to negotiate a softwood lumber agreement with the first black US president during the period of more than a year they were both in office, before Trump became president.
    It seems to have gone out of fashion for a Governor of the Bank of Canada to serve two terms. The last serving governor to be appointed to a second seven-year term was Gerald Bouey in 1980, but Poloz is young enough, barely, at 63, that he might still be considered for a second term.

    • Hi Andrew

      I did think of the Bank of Canada on Wednesday before their decision because things had flipped and everybody in financial markets expected the US Federal Reserve to cut as it did ( by 0.25%). So they were either off the pace or unwilling to let the Fed set interest-rates for them. Either way you both now have the same interest-rate as the Fed is targeting the top of its range. The new Libor replacement ( SOFR) closed at 1.76% on Thursday so a small oops.

      As to fiscal policy I like to follow those sort of rules but I am not sure the US has one so I cannot compare as The Donald loosened fiscal policy there as well. There was a time this might boost the Canadian Dollar but these days currencies mostly move on expected economic growth and in Canada’s case commodity prices.

      As to politics I am afraid that central bankers are now politicians. i think that is a bad idea but everywhere you look…..

  3. and they have to be addicted to QE , of course

    Lights, Camera , Music please ! …..

    You see the signs, but you can’t read
    You’re running at a different speed
    Your heart beats in double time
    Another QE and you’ll be mine, a one track mind

    You can’t be saved
    Oblivion is all you crave
    If there’s some left for you
    You don’t mind if you do

    Whoa, you like to think that you’re immune to the stuff, oh yeah
    It’s closer to the truth to say the BoE can’t get enough
    You know you’re gonna have to face it, you’re addicted to QE

    Might as well face it, you’re addicted to QE ( repeat )

    Your lights are on, but you’re not home
    Your will is not your own
    You’re heart sweats and teeth grind
    Another QE and you’ll be mine….

    forbin

  4. Hi Shaun

    I’m sure you’re right about Shafik but there might be an alternative explanation for her rise – I confess a slightly tongue in cheek explanation, but nevertheless a potential one.

    Many would argue, with considerable justice, that monetary policy and fiscal policy are complementary and would be better managed under the same roof as it were. Now the argument against this is of course that monetary policy can be rigged by the government and is better placed in the hands of an independent CB and there’s no doubt this argument has some merit. But fiscal policy is “rigged” or rather managed by the government anyway so what is actually gained by an independent CB? After all you’ve chronicled their various shortcomings over time, with justice, so the experiment is perhaps not a raging success. Maybe appointing someone like Shafik, who might well be compliant, and she certainly sounds that way, is a covert way of rebalancing economic management and leaving effective control of both monetary and fiscal policy largely in the hands of the government. I know it’s a bit conspiracy theory but you never know.

    • Hi Bob J

      In a way that is true as Shafik would presumably follow the example that Christine Lagarde has already set in following the wishes of most the Euro area that Germany should spend more. Of course Germany wants to do no such thing! Not something that really has an equivalent elsewhere in that other bodies have a national fiscal policy.

      The more honest route would be to scrap the MPC and for government to retake control of monetary policy. I think they fear that QE would then be shown up for what it is.

  5. maybe as we can replace soldiers now perhaps we don;t need a real person to be BoE governor

    something for the weekend , another view , a vision …

    uh oh

    forbin

    ( if the half life sounds effects didn’t give it away at the end )

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