Today is Bank of England day or what for a while became called Super Thursday. Actually there is quite an irony in that as due to a reform from the previous Governor Mark Carney they actually voted last night. He preferred to have his public relations plan in order over the risk to financial markets. Some of you will recall the latest addition to the QE programme ( some £150 billion) was announced by the Sun newspaper rather quickly after the vote and well before the announcement. In that instance it was embarrassing rather than something which costs people money, but even so some may not have been like us and expecting it.
I am not expecting any particular move today and want to look at the longer-term picture and strategy now for the Bank of England. Let me start with an international development which is related to our subject of yesterday, the monetary policy of the United States.
For those of you keeping score at home I just observed a new wide in 5s 30s at 146. ( @acrossthecurve)
What that means is that the US yield curve is steepening as the thirty-year yield ( 1.92%) rises more than shorter-dated ones. In the US the most immediate impact is on the thirty-year mortgage rate but the trend also filters around the world. The effect here has been smaller but our fifty-year yield is now 0.78% which is more than double what it fell to. Whilst it remains at a very low level it is a reminder that it can rise in spite of the QE bond buying as for example on its way to filling the extra £150 billion I discussed earlier the Bank of England has bought another £4.4 billion this week.
The UK Pound
This was a simple story as the Pound recovered from the dive in March last year. It has rallied in effective exchange rate terms from 73 to above 79. This started as a move against the US Dollar which was joined by the Yen and more recently against the Euro.
It is now more complex because in response to the yield shifts we noted above the US Dollar has been recovering a bit as it has pushed the Euro through 1.20 and the Yen through 1.05. Whisper it quietly as not many seem to have noted it but we may be seeing a stronger Dollar phase which would have an impact on inflation expectations via the way so many commodities are priced in it.
The Bank of England seems to have mostly forgotten the Pound, but using its old rule of thumb the rally I noted above is equivalent to a 1.5% Bank Rate rise.
Inflation
In spite of the increasingly desperate attempts to avoid measuring inflation of which the most obvious is ignoring house prices and the most recent the way that the surge (doubling/trebling) of puppy prices is being ignored ( apparently puppy prices are too difficult to collect which is news to my neighbours), it is set to be on the rise. The most obvious signal of that is the way that the price of a barrel of Brent Crude oil has approached US $59. Financial markets are also signalling this with the rises in what are called inflation break evens. I have no faith in the precise numbers calculated but do think the direction of travel means something.
Oh and did I mention house prices?
“January saw the annual rate of house price growth slow
modestly to 6.4%, from 7.3% in December. House prices fell
by 0.3% month-on-month, after taking account of seasonal
effects – the first monthly decline since June.” ( Nationwide)
The issue here is the surge we have seen at a time when the economy has been in distress. The Bank of England has thrown first-time buyers to the wolves in an attempt to claim wealth effects for existing home owners.
Still let me leave you with the Financial Times view. From Alphaville yesterday.
No, inflation isn’t back
Whereas today FT data tells us.
Hundreds of the essential products that have come to define pandemic living have sustained significant price increases on Amazon this year, with some jumping to many multiples of their original price, research suggests………….
PIRG found that of the 750 items, the prices of 409 had increased by more than 20 per cent, while 136 had more than doubled. Patio heaters, suddenly a must-have during winter lockdowns, had the most significant percentage increase, with one model up from $150 to $699 — a 366 per cent jump.
I think that is called covering all the bases.
The Economy
Here we have something of a dichotomy as the situation now is worse than thought (regular readers may recall me warning about the optimistic bias of official forecasts) but with the vaccine progress there is some genuine hope rather than hopium. The impact of the present lockdown is highlighted below by this week’s Markit PMI.
The seasonally adjusted UK Composite Output Index
registered 41.2 in January, down from 50.4 in December
and back below the crucial 50.0 no-change threshold. This
signalled a sharp drop in private sector output, and the
rate of decline was the fastest since May 2020.
This contrasted quite markedly with expectations.
“businesses remain confident that pent up demand and an easing of pandemic restrictions will provide a springboard to recovery later this year.
“Positive news on the UK vaccine rollout pushed up
business optimism to its strongest since May 2014 and
this improvement contrasted with a decline in confidence
reported by service providers in the euro area during
January.”
How much Brexit has affected trade is hard to say. There have been impacts on Northern Ireland but as we look wider we see that there has been a world wide issue as this tweet from the subcontinent points out.
Massive disruption for container turn-arounds all over world which started about 3 months ago but mainly in Europe added with equipment shortage are causing lengthy delays for importers and exporters in this part of the world. Part of it is over shadowing Brexit related customs and other documentary changes which has come into place. Rates have double and in some routes gone up 100/200% most of dissatisfaction comes because of that, not the additional documentary change, we see that everyday ( @UreshP)
Comment
I have left two major factors to last. The easiest is the issue of negative interest-rates about which external member Silvana Tenreyro is so keen. Whilst the review has been going on the boat has left port.In the meantime the UK actually had negative interest-rates as bond yields up to the seven year maturity went negative and still has then up t the five-year. So anything now looks purely symbolic as I do not expect them to be formally used until the next crisis when the “lower bound” will once again get lower.
The next factor is what is driving policy and returns me to a point I made back in March last year. Monetary policy has become subordinated to fiscal policy as the main role of the Bank of England is to buy the same amount of UK bonds as are issued. It does not buy them directly but via portfolio shifts gets other to do so. The problem is how it dismounts from this particular horse. That is more likely to come from fewer being issued via an economic recovery than any other route as otherwise the Bank is singing along with Colonel Abrams.
Oh, oh I’m trapped
Like a fool I’m in a cage
I can’t get out
You see I’m trapped
Can’t you see I’m so confused?
I can’t get out
Notayesmanseconomics's Blog 
Hello Shaun,
They don’t have to do anything . inflation is on the rise – isnt that a goal?
house prices are up ( or not , can we beleive the stats ? ( Zoopla ?? you’re having a giggle)
petrol is £ 4.97 1/2 per gallon – shinkflation abounds , almost all of my chocolate meets the 99 Kcal requirement for the same price (!!) , so I get a fun size bar thats meant for adults,,,
duh ! I’ll just eat two then, like everyone else
oh well perhaps I’m too fat anyway ……… hang on thats because I’ve been locked up by HMG for being a possible Coof carrier ( no proof needed apparently ) *
Forbin
* ” baaaa “, one mask good ,two masks better …. ( WHO statement) ( why not 3 or 4 ? hey lets try a whole body mask …. make it out of platics too , then there be no air leaks and possible virus release , that will work , wont it? )
Interest rates held at 0.10% and no member sought to change their minds, no doubt the BOE will say more in the minutes.
As to house prices which many on here are interested, here are some exgtracts from Barrattts today:
“Britain’s biggest housebuilder Barratt said on Thursday it continued to see strong demand after record house sales in the last six months of 2020, enabling it to reinstate its dividend as promised.
Britain’s housing market rebounded last year after initial coronavirus-related restrictions, as people took advantage of low interest rates and a stamp duty holiday. Barratt sold a record 9,077 new houses in the six months ended Dec. 31, up 9.2%.”
“”There is strong underlying demand and there has been good mortgage availability. That has attracted customers, leading to good reservations and completion volumes,” Barratt Chief Executive Officer David Thomas told Reuters.
House prices fell in January for the first time in seven months after fresh restrictions were imposed to combat COVID-19 and the March 31 deadline for the stamp duty tax holiday threatened to sour buyer’s appetite.
The company said it had nevertheless made a solid start to the second half of its financial year, with over 95% of this year’s homes forward sold. Total forward sales came in at 14,289 homes as of Jan. 31, compared with 13,043 homes as of Feb. 3 last year.”
With strong demand and good forward orders, I am still sceptical about a significant fall in house [prices this year bear in mind new house prices tend to be sold at a premium.
What could influence the market further is the extension of stamp duty cuts bear in mind the GOV seem to be suggesting an easing of lockdown will be much slower than Joe Public was hoping for.
Certainly in my area in the North West many estate agent are seeing “offers in excess” of the for sale properties which does suggest more house price inflation.
I read the BOE minutes later and press comments.
re “many estate agent are seeing “offers in excess” of the for sale properties which does suggest more house price inflation.”
I see the same arounds here , I’d suggest that actually the sellers are going to be disappointed .
Keep an eye on what they say ” in excess off ” in a months time……….
my prediction ? a spurt of inflation followed by stagnation then the BOE going full tilt mode on negative rates on the sign of house di-inflation towards the end of the year…….
hold onto your hats folks !
Forbin
I’m just waiting for someone at the Bank of England to come out and say price rises are deflationary as people will have less money to spend.
LoL ! +10
Massive spike in sterling just now???????????Someone at the Bank just misspoken?????I’m sure it will be immediately corrected.
Kevin
All 9 members sought to leave interest rates on hold dispelling some thoughts including mine of a potential cut!
Furthermore the BOE see a strong rebound in the economy come Spring when people start to spend!
This is interesting as Joe Public may decide to spend more on their properties and indeed also look for bigger homes with more space and gardens!
https://www.bbc.co.uk/news/business-55934405
Also of interest by By Samuel Indyk
Investing.com – “The Bank of England’s Monetary Policy Committee voted unanimously to kept interest rates unchanged on Thursday. The MPC also kept the size of their QE programme unchanged at £875bln in a decision that was inline with market expectations.
On negative interest rates, the Central Bank said they do not intend to signal that negative rates were coming. In the short-term it looks unlikely that negative interest rate policy will be announced by the central bank. However, they have requested that banks should start preparations for negative interest rates, if it was needed in the future.”
The BOE also thinks inflation will rise nearer to its 2% target which also had an impact on the £ rise after the minutes were released.
Question:
If the bank don’t think interest rates are coming then why ask the bank to prepare for them if needed in the future?
” it looks unlikely”
never believe anything until its officially denied !
Forbin
forbin,
Their computer systems not yet up to date, according to this article below but the planning is there!
https://www.msn.com/en-gb/money/news/boe-prepares-contingency-plans-to-set-negative-rates/ar-BB1dnQss?ocid=msedgntp
Correction to the above, if the BOE don’t think ‘negative’ interest rates are coming why ask the banks to prepare for them in future?
Hi therrawbuzzin and thanks for the link.
It is good timing as I was thinking of the Reddit crew this evening as I noted GameStop was down US $40 or so at US $51 in the after hours session. Sad but inevitable.
Nicely timed little spike in GBP/EUR after BoE announcements!
Reporting from sunny Tenerife, where you can more or less live normally except for the face muzzles, very nice without the average 6m tourists per annum. Must admit that covid not all bad, this time last year Thailand without the Chinese was bliss, now Canaries without the Brits/Germans is equally as good. But its mainly very bad! I am beginning to get very suspicious of the ‘all causes’ weekly deaths from ONS, 50% higher than normal since week 1 2021, vaccine effect?
Shaun, I think the problems with the TCA are only starting. Despite MSM reports, the EU side has not really been imposing full restrictions yet, but its to come over the next month or so. There is a continuing misunderstanding about the effect of not being in the single market. Still all talk is of customs barriers and duties, paperwork etc. These are issues which can be overcome with time, but what can’t and never will are the restrictions due to physical conformity. This applies from livestock, animal, fishery ‘health and condition’ ; manufactured goods compliance; to origin and added value. So effects everything from Scottish fish through to repackaged goods from S.E.Asia.
The UK is a 3rd country as far as the single market is concerned and nothing will now change that fact. It means all UK exporters have to have a EU based importer to complete and take financial and real risks on the imports. Gone for good are the days of loading stuff on the back of a truck and sending it off to mainland Europe.
The big guys will be able to handle this. The medium and smaller guys probably wont and will have to adjust. Some will relocate part of their operation, most wont/cant.
How much of the UK’s exports this will affect is unknown I think, but it will be significant.
re ” The UK is a 3rd country as far as the single market is concerned and nothing will now change that fact. ”
https://www.rejoinandreform.co.uk/
” Now Brexit’s done, our task’s begun! ”
yup , its started …..
Forbin
Not a cat in hell’s chance that the EU would start considering this. Even the EFTA/EEA door is slammed shut now. Of course none of that will stop the internal divisions continuing in the UK. As the covid situation continues to demonstrate, a lot of people lead sad, bitter lives.
Jim, you are right about customs paperwork and the EU, currently trying to buy a printer, the situation is desperate, nearly all Canon printers sold out everywhere, no one knows when stock is coming, various excuses, chip shortages, huge numbers working from home, and of course BREXIT, apparently a lot of stuff is being held up in EU warehouses, as the paperwork has changed and companies cannot get it out with out the new paperwork, so it is affecting imports as well as exports.
90% of the smaller guys don’t export to the EU.
Bailey sees unemployment peaking at 7.8% is this higher or lower than previous forecasts?
“Unemployment will peak at 7.8 per cent after the furlough scheme ends, according to the Bank.”
https://www.dailymail.co.uk/news/article-9223767/Bank-England-cuts-growth-forecasts-year-amid-lockdowns.html
One has to take some of these forecasts with a pinch of salt as no one can see an end to the current covid pandemic and how it will affect the economy longer term.
When you say, “A pinch of salt.” do you mean, “Three tabs of acid?”
NZ is running out of space to store empty shipping containers.
Hi Eric
That is interesting as all the reports over here are about higher shipping prices and shortages.
What is different about New Zealand?
Hi Shaun, In normal times (remember those?) about 30% of shipping containers leave NZ empty . That’s a result of the dry goods trade imbalance. Refrigerated shipping is much more efficient.
A consequence of the exploding costs is that shippers are reluctant to ship empty containers. Ports of Auckland began to run out of space to store empty containers about 3 months ago.
It’s reckoned that shipping containers spend half their useful working life sitting around empty.