What next for the Bank of England?

Today is what used to be called Super Thursday for the Bank of England. It was one of the “improvements” of the current Governor Mark Carney which have turned out to be anything but. However he is not finished yet.

Starting on 7 November, the Bank of England Inflation Report is to become the Monetary Policy Report. The Report is also to undergo some changes to its structure and content.

These changes are part of the Bank’s ongoing efforts to improve its communications and ensure that those outside the institution have the information they need in order to understand our policy decisions and to hold us to account.

Really why is this?

The very latest changes represent the next step in the evolution of our communications.

I suppose when you tell people you are going to raise interest-rates and then end up cutting them you communication does need to evolve!

Communication let me down,
And I’m left here
Communication let me down,
And I’m left here, I’m left here again! ( Spandau Ballet )

The London Whale

There was so news this morning to attract the attention of a hedge fund which holds some £435 billion of UK Gilt securities as well as a clear implication for its £10 billion of Corporate Bonds. From the Financial Times.

Pimco, one of the world’s largest bond investors, is giving UK government debt a wide berth, reflecting concerns that a post-election borrowing binge promised by all the major political parties could add to pressure on prices. Andrew Balls, Pimco’s chief investment officer for global fixed income, said the measly yields on offer from gilts already makes them one of Pimco’s “least favourite” markets. The prospect of increased sales of gilts to fund more government spending makes the current high prices even less attractive, he said, forecasting that the cost of UK government borrowing would rise.

Yes Andrew Balls is the brother of Ed and he went further.

“Gilt yields look too low in general. If you don’t need to own them it makes sense to be underweight,” he told the Financial Times.

Actually pretty much every bond market looks like that at the moment. Also as I pointed out only yesterday bond markets have retraced a bit recently.

The cost of financing UK government debt has been rising over the past month. The 10-year gilt yield has reached 0.76 per cent, from 0.42 per cent in early October. That remains unattractive compared with the 1.84 per cent yield available on the equivalent US government bond, according to Mr Balls,

Mind you there is a double-play here which goes as follows. If you were a large holder of Gilts you might be pleased that Pimco are bearish because before one of the biggest rallies of all time they told us this.

Bond king Bill Gross has highlighted the countries investors should be wary of in 2010, singling out the UK in particular as a ‘must avoid’, with its gilts resting ‘on a bed of nitroglycerine.’ ( CityWire in 2010 ).

Also there is the fact that the biggest driver of UK Gilt yields is the Bank of England itself with prospects of future buying eclipsing even the impact of its current large holding.

House Prices

As the Bank of England under Mark Carney is the very model of a modern central banker a chill will have run down its spine this morning.

Average house prices continued to slow in October, with a modest rise of 0.9% over the past year. While
this is the lowest growth seen in 2019, it again extends the largely flat trend which has taken hold over
recent months ( Halifax)

Indeed I suggest that whoever has to tell Governor Carney this at the morning meeting has made sure his espresso is double-strength.

On a monthly basis, house prices fell by 0.1%

This is the new reformed Halifax price index as it was ploughing rather a lonely furrow before. We of course think that this is good news as it gives us another signal that wages are gaining ground relative to house prices whereas the Bank of England has a view similar to that of Donald Trump.

Stock Markets (all three) hit another ALL TIME & HISTORIC HIGH yesterday! You are sooo lucky to have me as your President (just kidding!). Spend your money well!

The Economy

This is an awkward one for the Bank of England as we are on the road to a General Election and the economy is only growing slowly. Indeed according to the Markit PMI business survey may not be growing at all.

The October reading is historically consistent with GDP
declining at a quarterly rate of 0.1%, similar to the pace
of contraction in GDP signalled by the surveys in the third
quarter

Although even Markit have had to face up to the fact that they have been missing the target in recent times.

While official data may indicate more robust growth
in the third quarter, the PMI warns that some of this could
merely reflect a pay-back from a steeper decline than
signalled by the surveys in the second quarter, and that the
underlying business trend remains one of stagnation at
best.

The actual data we have will be updated on Monday but for now we have this.

Rolling three-month growth was 0.3% in August 2019.

So we have some growth or did until August.

The international environment is far from inspiring as this just released by the European Commission highlights.

Euro area gross domestic product (GDP) is now forecast to expand by 1.1% in 2019 and by 1.2% in 2020 and 2021. Compared to the Summer 2019 Economic Forecast (published in July), the growth forecast has been downgraded by 0.1 percentage point in 2019 (from 1.2%) and 0.2 percentage points in 2020 (from 1.4%).

The idea that they can forecast to 0.1% is of course laughable so it is the direction of travel that is the main message here.

Comment

If we move on from the shuffling of deckchairs at the Bank of England we see that its Forward Guidance remains a mess. From the September Minutes.

In the event of greater clarity that the economy is on a path to a smooth Brexit, and assuming some recovery in global growth, a significant margin of excess demand is likely to build in the medium term. Were that to occur, the Committee judges that increases in interest rates, at a gradual pace and to a limited extent, would be appropriate to return inflation sustainably to the 2% target.

Does anybody actually believe they will raise interest-rates? If we move to investors so from talk to action we see that in spite of the recent fall in the Gilt market the five-year yield is 0.53% so it continues to suggest a cut not a rise.

More specifically there was a road to a Bank of England rate cut today as this from the 28th of September from Michael Saunders highlights and the emphasis is minr.

In such a scenario – not a no-deal Brexit, but persistently high uncertainty – it probably will be
appropriate to maintain an expansionary monetary policy stance and perhaps to loosen further.

He was an and maybe the only advocate for higher interest-rates so now is a categorised as a flip-flopper. But it suggested a turn in the view of the Bank in general such that this was suggested yesterday by @CNBCJou.

Looking forward to the BOE tomorrow where the new MONETARY POLICY REPORT will be presented (not to be confused with the now defunct INFLATION REPORT). A giant leap for central banking. * pro tip: watch out for dovish dissenters (Saunders, Vlieghe?) $GBP

The election is of course what has stymied the road to a return to the emergency Bank Rate of 0.5% as we wait to see how the Bank of England twists and turns today. Dire Straits anyone

I’m a twisting fool
Just twisting, yeah, twisting
Twisting by the pool

The Investing Channel

 

 

15 thoughts on “What next for the Bank of England?

  1. shaun,

    “What next for the Bank of England?”

    Each member should be sectioned under the mental health act for continuing to advocate rate rises will come in due course when the global economy is continuing to slow and most stats suggest global interest rates are to stay lower for longer and the UK will probably have to follow,

    • So MPC just met and interest rates unchanged and 7 unchanged and 2 vote for a cut. All things being equal the £ will fall.

      The BOE is behind the trend imo they should have cut today as it takes time for a cut to take full effect.

      • Hello Peter,

        I’d posit that they have left any cut far too late , even if they cut to 0% ……

        the ship has sailed, the horse bolted …..

        Forbin

  2. So more news emerging on MPC two voted for a cut and “others” of the same mind if the global economy doesn’t pick up https://uk.reuters.com/article/uk-britain-boe/bank-of-england-surprises-as-two-mpc-members-vote-for-rate-cut-idUKKBN1XH1NG?feedType=RSS&feedName=domesticNews

    Most analysts caught out with the change of stance. Also growth forecasts been cut in Europe today together with a warning on UK growth.

    Little wonder the UK stock market bounced recently and markets in the US as well, lower interest rates tend to boost markets.

    There is also a change of stance on the likelihood of a rise in future members softened their stance today.

    So any predictions when the BOE will cut rates?

    • I know its upsetting some posters my comments today but I am just being hones and frank about all this, global interest rates are falling around the globe the UK was bound to follow.

      I suppose some will take the view that lower rates will tend to halt property price falls and to some degree that is correct.

      However the pack of cards will still fall at some stage due to other factors. Its a new world in economics now imo.

    • well we could do poll

      I’d start with January 2020 for a cut of 0.25%

      the rules are if you have another date in mind then post that date. anyone who agrees with the date then can just uptick that post .

      no down ticks will be counted as if you disagree then post your own date – even if its one for a rise ! ( post how much of a rise too )

      ok folks?

      forbin

      • Forbin, I think January is too soon after the election result and the BoE will want to see what effects the new Government has on markets/business sentiment etc. Therefore, I’d say a rate cut is more likely in March 2020.

        Personally, I’d like to see a 0.25% rate rise in March but that’s never going to happen.

        • forbin,

          Yes January. Next month may be too soon but it will be tight. There will be many more jobs lost in January after retail sales, so that will be the time to cut 0.25% or even more if things have deteriorated further by then.

          I actually think they should cut next month but there we are.

  3. Sterling dropping like a stone on the news, I expect the election to solve precisely nothing as far as uncertainty over BREXIT is concerned since the new super Boris agreement(TMay’s agreement re-heated) will only lead to more fighting and sabotage from the DUP’s, BREXIT MP’s and SNP and the dreaded Transition period where the talks on trade have to be finalised, Of course the EU will be as obstructive and as intransigent as they have been since the beginning of withdrawal negotiations, refusing to agree to anything that doesn’t either give them exactly the same terms (or even worse) and control over us that we have now, meaning these “talks” could drag on for another THREE years, and of course they would then start negotiations over whether we can have an extension to the transistion period, so basically this will never end until we are back under full EU control, however long it takes and to quote Draghi “whatever it takes”.

    Regarding the Bank of England, I fully expect it to mirror the Fed and introduce “NotQE” in some form, especially as gilt yields will start to rise following the opening of the monetary spigots, they will have to keep buying to keep interest rates on the floor for the housing market, and also (less likely) to reverse any recovery in the pound.

    You don’t have to be a Pimco bond fund manager to see gilts offer a lower yield than Treasuries and also have the added guarantee of the depreciation of sterling to make avoiding the trade a no brainer, so expect NotQE to accelerate in line with the spending.

  4. Great blog as usual, Shaun.
    If you examine the summary at the beginning of the inaugural “Inflation Report” in February 1993, it notes: “Following the suspension of sterling’s membership of the exchange rate mechanism on 16 September 1992. the commitment to price stability has been embodied in an inflation target. The Chancel lor [Norman Lamont] announced a target range for inflation of I%-4% a year in October. And later that month, in his Mansion House speech, the Chancellor invited the Bank of England ‘to provide a regular report on the progress being made towards the Government’s inflation objective.’” The name of the report was obviously chosen to emphasize the link with the new inflation targeting regime, and was probably appropriate at the time, given a fair number of people didn’t seem to understand that this was a new policy regime, something the Bank of England had never seen before, and not simply the latest iteration of targeting monetary aggregates. However, that title had long outlived its usefulness, and the new title, “Monetary Policy Report”, which was the title of its Canadian counterpart since long before Mark Carney became its governor, is clearly an improvement.
    I was disappointed with the reorganization of the contents of the quarterly publication. Housing prices are covered in section 2.2, demand and output, so they remain segregated from price and inflation measures, covered in section 2.3, supply, costs and prices. Although housing prices have been part of the Retail Prices Index since 1995, this odd organization is obviously meant to drill in the ideological message that dwelling or housing prices have no role in measures of consumer price inflation. It is not something the Bank of England has any right to be dogmatic about, given that it held a different view itself, for much of the period it has had an inflation targeting regime.

    • Hi Andrew

      Thanks for the reminder of the genesis of the inflation targeting regime and hence the Inflation Report. For younger readers inflation had risen to 9.3% in 1990 and the UK joined the ERM ( a forerunner of the Euro) partly to help with that but then got ejected. So it needed a new framework which had been beginning in Canada and New Zealand.

      As to house prices you can almost hear the screams about wealth effects.

      “Leading indicators of the housing market, including timelier but narrower measures of house prices, suggest UK house price inflation has stabilised just above zero. The lower rate of price inflation may be feeding through to house building: the number of private housing starts in England was around 10% lower in 2019 Q2 than a year earlier.”

      The name change is indeed very Canadian and I think also revealing about Mark Carney’s interest in inflation targeting,

  5. Hi Shaun

    The folk at PIMCO do have a point; with all and sundry preparing to spend huge amounts of money after the election there should be rate rises on the visible horizon if these plans are followed through.

    However, the BOE won’t want to puncture the Ponzi so will be extremely reluctant to raise official rates, particularly in view of the incipient slowdown which could turn into something much nastier.

    I wonder if we’ll get a taste of MMT to try and square the circle, not complete monetisation but certainly partial. The result might well be inflation down the road but the downturn should keep a cap on that in the short term and the long term is well, the long term and can be laid on one side as can kicking and looking through have been the order of the day for the last ten years so why change?

    • Hi Bob J

      You make a fair point about the extra spending.Although ironically there was someone on from the IFS on BBC 5 Live earlier saying in several areas it would take a while to build the spending up. However as an ex bond trader I had a wry smile at US Treasuries having a much worse day than UK Gilts. From the levels quoted in the FT our benchmark yield rose by 0.4% and the US one by 0.8%.Actually it was a bad day for bonds continuing a recent trend although the US turned away from 2%.

      As for the Bank of England’s next move we will get a signal from who the next Governor is. But there was a signal today by the supposedly independent and intelligent Jonathan Haskel voting for a rate cut

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