The Bank of England has been forced to face its own failures

Yesterday was not an especially good day for the Bank of England. As I pointed out several weeks ago it was clear that Governor Andrew Bailey thought that the move below would be his bazooka.

 At its meeting ending on 3 August 2022, the MPC voted by a majority of 8-1 to increase Bank Rate by 0.5 percentage points, to 1.75%.

Unfortunately for him the world had moved on with the US moving by 0.75% twice and Canada by 1%. Even the ECB had moved by 0.5%. So the grand unveiling of the biggest interest-rate increase of the “independent” Bank of England era was greeted by markets with a shrug as it had become more of a peashooter.

Actually the Bank of England rather shot itself in the foot with its rhetoric.

CPI inflation is expected to rise more than forecast in the May Report, from 9.4% in June to just over 13% in 2022 Q4, and to remain at very elevated levels throughout much of 2023, before falling to the 2% target two years
ahead.

That was supposed to evoke images of the Bank being a doughty inflation fighter setting about its task. But with inflation forecast at 13% then interest-rates of 1.75% look most definitely like a peashooter.

In fact if we look at the rate of change the Bank of England has another problem. It may think that its 0.5% rise is major. But as the inflation peak has just risen by 2% then it has lost 1.5% in relative terms.

Inflation Forecasting by the Bank of England

Here is what it is telling us now.

Twelve-month CPI inflation had risen to 9.4% in June, 0.3 percentage points above the May Report projection……CPI inflation was expected to rise to around 10% in July and remain at around this level through the rest of the third quarter, reflecting higher fuel, food and services prices……In 2022 Q4, CPI inflation was expected to rise to just over 13%, about 3 percentage points higher than the expectation at the time of the May Report and more than 2 percentage points higher than at the time of the June MPC meeting.

As you can see even their own forecasts have been forced to admit the extent of their errors where they have got nothing right. Or if you prefer we know this because they are setting up a scapegoat.

The majority of that upside news was due to higher expected household energy prices. That primarily reflected the very substantial rise in wholesale gas futures prices that had occurred since the May Report, most recently due to Russia’s restrictions of gas supplies to European markets in July and due to the risk of further curbs. Since May, sterling gas futures prices for end-2022 had nearly doubled.

The problem with that is this

Bank of England CPI inflation ‘peak’ forecasts*:

Nov 21: “peaking at around 5% in April 22”

Feb 22: “peaking at around 7.25%  in April 22”

May 22: “may rise to in excess of 10% towards the end of the year”

Aug 22: “just over 13% in 2022 Q4” (* % y/y change) ( @MichaelGoodwell )

I see a media narrative developing that is reinforcing the Bank of England view. Cynics would say that is because they too pushed the “inflation is transitory” line. But if we stick to the facts UK CPI inflation reached 5% ( in fact 5.1%) last November just as the Bank of England was assuring us it would not get their until April. It then passed 6% in February.

How much more wrong could Chief Economist Huw Pill have been on the 26th of November? The emphasis is mine.

In large part, I agreed with the Bank’s published analysis that argued that the bulk of the above-target inflation anticipated from September would prove transitory. I believed that the uncomfortably high inflation rates we will face in the coming months mainly reflected temporary factors, such as the pandemic-driven supply bottlenecks I discussed earlier, which are likely to ease as the health situation improves.

My starting point was that monetary policy should largely ‘look through’ these effects.

He was already wrong as the November inflation figures proved. Since then it has gone from bad to worse. Yes the Russian invasion of Ukraine has made things worse but we already were in a vulnerable situation with inflation heading to treble its target.

Inflation is being under recorded

This issue is being missed completely and let me explain why. Inflation calculations use a weight for expected spending and they are adjusted each year which with the delays of measurement and so on mean they are usually around 2 years behind. But expenditure on domestic energy has soared as the Bank of England explains below.

The direct contribution of energy to CPI inflation was projected to reach 6½ percentage points in 2022 Q4, nearly 2½ percentage points higher than in the May Report and expected to account for more than half of the overshoot of CPI inflation relative to the 2% target. The rise in energy prices was likely to have additional indirect effects on CPI inflation by increasing firms’ costs, which were then likely to be passed on to a wide range of prices for non-energy goods and services. Bank staff estimated that these indirect effects would contribute around 1 percentage point to CPI inflation in 2022 Q4.

So people will be spending much more on energy than when the inflation weights were calculated. If we look at what they are we see a familiar situation.

RPI 4.8%

CPI 3.3%

CPIH 3.1%

The “discredited” and “not a national statistic” RPI is reflecting reality much more accurately than the other measures. As it turns out even it is too low as households will be spending much more on energy this year. Perhaps a weight of 7.5% would have been realistic and that is the way inflation has been under-recorded as the increases have been factored into inflation with too low a weight.

The statisticians are trying their best as the main problem is that events have moved too fast for them. But more sophisticated analysis should allow for this. Now tell me where you see anyone else pointing this out? The Bank of England should be but it only makes its own position worse.

Recession?

Regular readers know my views on stagflation risks but let me point out another issue with the Bank of England.

Monthly GDP was estimated to have increased by 0.5% in May, following a 0.2% decline in April. The May outturn had been weaker than Bank staff had expected,

May was weaker than expected,really?

Comment

Let me first hand you over to the absent-minded professor.

UK BOE DEP. GOV. BROADBENT: TO FULLY OFFSET CURRENT INFLATION, WE WOULD HAVE NEEDED TO RAISE INTEREST RATES BY DOUBLE DIGITS LAST YEAR, RESULTING IN A MUCH DEEPER RECESSION THAN IS NOW PREDICTED. ( @financialjuice )

This is extreme even for a straw(wo)man effort. The reality is that he was busy making things worse as I pointed out last August.

The Bank of England has bought another £1.15 billion of UK bonds this afternoon as part of its QE operations. The problems are

1. Inflation is above target

2. Look at what bond yields are ( August 4th 2021)

And from September 21st last year.

The Bank of England has just bought another £1.15 billion of UK bonds as part of its QE operation to push inflation above target. ( Yes I know it is already above target so tell them not me please)

So Ben Broadbent and his colleagues were actively pushing inflation higher when I was arguing to take the stimulus away ( stop QE and put interest-rates back to 0.75% as an initial move). Which do you think looks best now?

The problem that Ben and the other 8 policymakers have now is that they have been so wrong markets mostly ignore them. They have increased interest-rates to 1.75% with the implication that there will be more rises on their way. The UK five-year yield is 1.73% and says we may get another rise or 2 but we are expecting cuts shortly afterwards.

Also there was a potential new phase of QT announced yesterday which I will cover in today’s podcast.

33 thoughts on “The Bank of England has been forced to face its own failures

  1. Great article as always Shaun. You were always the solitary commentator holding the boe to account. Finally that view is starting to trickle into the mainstream.

    And the shameless Bailey asking for people not to have payrises. the usual flacid interviewer letting him get away with it. He should be asked if he could lead the way with a paycut. Or maybe forfeit his own salary due to incompetance?

    It also interesting to see the ‘carnage’ a 0.5% rise has promoted in the media. That poor house buyer who is having to cut her purchase level by 200k. As always the biased bbc is able to trot out 3 people who have had a negative impact of the rate rise, and 1 person who hasn’t.

    What about savers whose savings have been eroded for 20 years. And the generational damage high house prices have impacted soceity. Maybe the pigeons are finally coming home to roost…..

  2. Shaun,

    “So Ben Broadbent and his colleagues were actively pushing inflation higher when I was arguing to take the stimulus away ( stop QE and put interest-rates back to 0.75% as an initial move). Which do you think looks best now?

    The problem that Ben and the other 8 policymakers have now is that they have been so wrong markets mostly ignore them. They have increased interest-rates to 1.75% with the implication that there will be more rises on their way. The UK five-year yield is 1.73% and says we may get another rise or 2 but we are expecting cuts shortly afterwards.”

    Danny Blanchflower is saying he has been warning of a recession for quite a time now but the BOE have failed to use the R word time and time again yet in the press statement yesterday they used it about numerous times, idiots.

    https://www.newstatesman.com/quickfire/2022/08/david-blanchflower-bank-of-england-uk-recession

    DB is saying commodity prices are falling fast and we could be seeing deflation soon which will force the BOE to start to reverse rates, the latter is what the bond markets seem to be forecasting.

    Thanks for the link to the BOE press conference I have no doubt I will be that bored listening to the full conference which will help me fall asleep one night.

    As I said yesterday raising interest rates won’t do much to current inflation which is part governed by things out of our contol the war in Ukraine has caused most of the damage. What will happen is raising rates will curb consuker spend further and add to household bills and bring about a nearer recession. If the GOV isn’t careful we will see riots on the street later this year.

    There is no easy answer to the current gloomy forecasts some are arguing Liz Truss is wrong to be seeking tax cuts now but she has an argument cuts in corporation tax will help business investment in the UK. The problem I see with that argument is there aren’t that many businesses want to invest in a recession which could be deeper than 2008.

    • They’d only be wrong if they were acting in pursuit of the policies they claim.
      Given the impact, sanctions against Russia now look like they were DESIGNED to STOKE WESTERN INFLATION, rather than hurt Russia.
      The MPC’s policies now look like they were DESIGNED TO STOKE INFLATION rather than ameliorate it.
      Net Zero policies look like they were DESIGNED TO STOKE INFLATION, rather than lead us to the Promised Land.
      The Worldwide attack on farming looks like it was DESIGNED TO STOKE FOOD INFLATION rather than clean our rivers.
      The hysterical printy-printy during lockdowns, & indeed the lockdowns themselves, now look like they were DESIGNED TO STOKE INFLATION, since they were needless according to a million medical professionals.
      How many coincidences do you need?
      Since tptb are not saying what they are really doing, it must be malign, can you disagree?
      It is now UK Gov’t. policy to pauperise its masses, & thatis treason.

      DEATH to the cabal!

  3. How convenient it is to put the blame for all our woes on Russia. No-one mentions the massive money printing (QE) in response to covid. If there’s a lot of liquidity sloshing around the system it isn’t surprising that when it works itself out into the real economy it creates inflation.

    • Lets be honest the world economies hadn’t picked up really after the last financial crsisis in 2008 it was being supported by QE. Then covid caused havoc so more money printing had to be done as well as furlough, the war just exacerbated the whole situation. They threw far too much money at furlough but it’s all very well saying that after the event. Rishi was Chancellor and arguing the GOV had to act fast to protect business going bust and lockdown would have caused riots if the Gov not stepped in the furlough while in lockdown.

      Unfortunately the GOV built up too much debt and I predicted months ago we were heading for a recessionn and many more people including Shaun and also Danny Blanchflower were saying the same thing.

      It had been very noticeable for months with most the PMI data going south.

      As to where we are heading the bankers tend to get things wrong with thir predictions. You only have to look at what they were saying before BREXIT. If we left we would face massive interest rates a recession and fall in property values, the opposite happened.

      Althougn inflation will stay high for some time, commodities are already falling and so are shipping costs, oil is on a downward trend. If Liz Truss plan works out in cutting corporation tax and it helps boost business we may avoid the worst recession imo then see interest rate cuts sooner than many think.

      What concerns me most at the moment is if the cost of living gets much worse people there is a fair percentage of the population struggling to eat never mind pay their energy bills and it wouldn’t take much for riots to start in our cities.

      People can only be pushed so far before they retaliate. I wouldn’t want to be a party leader at the moment no GOV tends to stay in power with a recession and with the BOE warning of a recession throughout 2023 there isn’t much time to turn round the ecomomy, it takes time to work things through.

      If I was a betting man I would bet interest rates could well fall back again some time next year.

  4. Why is it busineses cannot get things done , heck I know goverment is slack but private companies

    shortages abound and cause inflation for what can be got

    you are number 68 in the que

    “thank you for taking the time to call Benson s for Beds , your call is important to us..”

    ahahaha

    And , no , this is just the covid bonus , forget what MSM are saying , they’re just lying again

    Just wait for October for the Ukrainia war bonus to hit

    it aint pretty , its pretty big an’ ugly , and regardless of any fan , you and I are in for it (!!)

    Forbin

    Sorry why am I in this cart and where are we going again?

  5. Broadbent is a liar.
    Interest rates @ 5% would have been enough to head off systemic (rather than deliberately caused) inflation, for 2 reasons:
    1) We’d have been ahead of the game, & our currency would have been considerably higher, offsetting some of the inflation.
    2) Market sentiment. Looking like you’ve been dragged, kicking & screaming, into what in effect are piffling interest rates, casts a different shadow than looking as if you’re trying to take the whip hand against inflation.

    • Hi therrawbuzzin

      It was a classic absent-minded professor statement claiming we would have needed double-digit interest-rates to ward off inflation. Firstly he is using the same economic models which told us inflation would be “transitory”. Next we all know that due to the long time that we have had ZIRP in the UK and even going below the “emergency” rate of 0.5% that what used to be considered modest rises would have a strong impact.

      What was also needed was to get on with it. Putting it another way this is why the Bank of England got the interest-rate job, as politicians often dithered about raising rates and made things worse. Yet they have just done exactly the same.

    • Right on the £ falls after the hike but as I said yesterday there is no guarantee a hike would increase the £ other things can affect currencies. The market is forecasting a peak imo and a cut if the recession caused further damage to the UK.

  6. In what other “profession” would someone who is so consistently wrong, completely incompetent and obviously lying to either cover up their ineptitude or the fact that they are pursuing another agenda (folloiwing the totally discredited Philip’s curve model and Keynsian economics that inevitably leads to eventual inflation and currency debasement), be allowed to remain in their job, let alone be feted by the media, the government and society as a whole and as if the above were not incredulous enough, be paid over half amillion pounds a year with an index linked pension?.

    Either the entire world has become entranced in some form of mass psychosis or hypnosis that is leading us to an inevitable financial collapse,or it is being misled by a group of very powerful people that control international banking(that have all been taught and accept Keysian economics as gospel), entire governments(reliant on their ponzi/welfare state vote buying fiancing through central bank financing of their debt),and controlled mass media propoganda, fake news and biased reporting.

    I’m pretty sure I know which one I believe it is.

    • You know that most of us on here agree with
      you.
      I’m an ancient model with 49 years being self
      employed so I’ve seen many ups an downs but
      where we are now is a unique situation. With
      stagflation and supply issues CB’s will do
      anything it takes to protect themselves and the
      precious. My personal bug bear is that so far
      none of the high street banks have responded
      to increase savings rates and that will cost them
      because the peasants will revolt.
      JRH

      • Well we have had nearly 13 years of zero rates for savers and I don’t see anyone revolting yet.

        In fact the people who were totally irresponsible and borrowed the most -way beyond what they could afford – and were effectively given those gains by the interest lost to savers,have been rewarded with unimaginable gains from propery and stock market investment. And it is those irresponsible people that central banks keep rewarding by trying to prevent the system correcting and in the process protect their precious. This has led to bubble after bubble after bubble, and yet no one is rioting?

        I have yet to see any action by central banks that would lead me to think they are going to mend their ways(the Fed maybe…..but I think it is more about them protecting the dollar and its reserve status at the moment), you might be right eventually but there is no evidence of even a mild stirring amoungst the masses yet, even the prospect of £3,500 p.a utility bills hasn’t yet produced a reaction so what will it take?

        • For people who have a tidy sum interest following base rate
          would make quite a contribution to their inflation. I didn’t mean
          revolt in the literal sense just transferring funds or asking to
          close accounts for cash would make them think for a start.

        • ‘If “full employment” is anything under 5% unemployment and “price stability” is core inflation below the Fed’s 2% target rate then the Fed has achieved its dual mandate a whopping 3.5% of the time since 1957 when core inflation was first tracked.  Yes, you read that right.  THREE POINT FIVE PERCENT OF THE TIME.*  That means the Fed has failed to simultaneously achieve both its mandates 96.5% of the time.  I wouldn’t call that failure.  I’d say they’re not even trying. And maybe they’re not?’
          https://www.pragcap.com/feds-dual-mandate-bull-sht/

  7. I still think that war, broken supply chains and rank profiteering are what’s driving inflation right now. Raising interest rates last November may have made a marginal difference but even that assumes there would have been no negative consequences.

    If I may brag as humbly as possible I said a couple of months ago the only way to squeeze inflation out now is recession, any other way would include ‘the rich’ paying their fair share which won’t happen under any Tory government especially this one. It is government inaction that has brought us here.

  8. Im no supporter of BoE it was too far behind the curve in reacting to the original inflation spurt coming off the back covid spending splurge let alone spurt 2 from Ukraine invasion. The fact is though there is little they can do to suppress the impact of gas prices as we are a bit player in the world so until there is global demand destruction prices aren’t going to fall anytime soon especially as Europe’s only real alternative for next few years is to bring in LNG which with all the additional costs in liquifying, transporting and regasification will always cost more let alone the competition across the globe for cargoes.

    The other thing i don’t get is why govt keeps subsidising peoples fuel bills at that level rather than feeding subsidies in at source to suppress the energy price cap level and thus lower inflation rate. They should have also decoupled wind/solar generation costs (even there elevated subsidised levels are less than system price most days) from the electricity market as gas is setting the price almost everyday and forcing up the system price which renewable generators are benefitting from. This would also provide a lowering of utility bills although granted not that much. Then thirdly utility bills are having to absorb the costs of supplier failure which is just outrageous but to then allow it to push up the energy cap and thus the inflation rate is plain daft.
    oh and the suggestion Kwarteng is pencilled in as CHEX in a Truss cabinet beggars disbelief if it comes to pass.

    • If you start feeding in subsidies it gets more & more difficult to stop.
      If you pay a direct sum to consumers as a one off, you neither commit yourself to future payments, nor do you ameliorate the inflation you’ve worked so hard to generate.

  9. Hi Shaun
    We are in a long predicted crisis/meltdown the playtime PM is on holiday as is the Chancellor.
    The ridiculously protracted Tory Leadership contest candidates are living in some sort of fantasy land where everything in the garden is rosy and tax cuts are a cure all.
    My view is the BoE had no intention or ability to control the inflation they and the politicians created.
    The debt based fiat currency system always collapses as debt and inflation is inherent.
    We can rightly criticise the BoE for not raising interest rates but not last year but a decade ago.
    Currently if anyone saves money in a bank may get about 1-2% so losing about 10% per annum.
    So no point saving any money Viv Nicholson would be a wise woman today.
    The truth is we are all being impoverished by the monetary system and the Conservative Party which was previously consumed by UKIP has now assimilated by the late Lord Sutch’s Party who have ideas to rival his abolition of winter policy.

    • Hi Private Fraser

      I do not know if you saw my reply to therrawbuzzin yesterday but here is part of it again.

      Here is Bank of England Deputy Governor Charlie Bean from the 28h of September 2010.

      “It’s very much swings and roundabouts. At the current juncture, savers might be suffering as a result of bank rate being at low levels, but there will be times in the future — as there have been times in the past — when they will be doing very well.

      “Savers shouldn’t see themselves as being uniquely hit by this. A lot of people are suffering during this downturn … Savers shouldn’t necessarily expect to be able to live just off their income in times when interest rates are low. It may make sense for them to eat into their capital a bit.”

      Charlie is not doubt living rather well off his RPI linked pension whereas savers have seen a decade of hard times.

      I am not as upset as some about major politicians being on holiday as Belgium did not have a government for 18 months and did really rather well.

      • Hi Shaun

        No hadn’t seen that thanks.
        Great point about Belgian Government 🤣
        Savers have had a raw deal for a considerable length of time not looking to live off it just protect the purchasing power of savings .

  10. Well Done Shaun, an indictment of the whole sorry mess. Destroying the “time-value” of money caught them in a trap. The group of people in a dark room are still fumbling for the door handle – 13 years now.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.