It has been a rough ten days or so for the Bank of England since its last policy meeting and we have a new turn in its policy which is the intervention of its Financial Policy Committee in the UK bond market. But let me start with last night as a policymaker revealed that she at least was thinking along the lines I suggested for the last meeting.
LONDON, Oct 3 (Reuters) – Bank of England policymaker Catherine Mann said her vote last month to raise Bank Rate by 0.75 percentage points reflected her concerns about a weak currency, rising inflation expectations and the boost to household incomes from an energy price cap.
In isolation I agree with that and last night she went further.
Mann said her vote was driven by factors that had been building over the course of the year, including how tighter U.S. monetary policy had tended in the past to weaken sterling and increase British inflation, which is now near a 40-year high.
She has spoken previously about concerns about the currency and inflation risks. This is something of a trend in that US members of the Monetary Policy Committee seem to be more on the ball on this subject than UK ones. As you can see below she also went further.
“I do see increasingly embedded inflation, I do see inflation expectations drifting, I do see a sterling depreciation spillover and I do see daylight between real incomes and real consumption possibilities,” she said in a discussion at Canada’s C.D. Howe Institute.
She has been consistent on this subject as here are her words from the 20th of June.
I voted for a 50 basis point increase at the last MPC meeting. In my view, a more robust policy move, based on both domestic conjuncture and commensurate with the global factor, reduces the risk that domestic inflation already embedded is further boosted by inflation imported via a Sterling depreciation.
It is a shame that she has not been able to influence the others who have assumed the ostrich position on this issue.
Buying More UK Bonds
Having been such a critic of the plans to sell some of the QE bond holdings as you can imagine I had a wry smile as we saw the Bank of England buy more! What could fo wrong with selling into a falling market. We did see something of a swerve as this was presented as a market move and so “not QE”, and we saw the Financial Planning Committee or FPC move out of the shadows and authorise it. In terms of detail I found that fascinating as 4 of the members which include the Governor are the same as the MPC. But it is so little known that that seemed to escape people including those who should know better.
Where are the eight members of the MPC? Why have they not demanded an immediate meeting – actions are being taken that do not involve them but should. Why? If @hmtreasuryis running monetary policy and does not want them to intervene they should resign ( @D_Blanchflower )
It appears he was unaware how many of them were also on the FPC. In fact social media had a really bad time as for example here is Jess Phillips who is a member of parliament for the Labour party
First rule of politics -“learn to count!” Perhaps Kwarteng can now sit in a room and be forced to count to 65 Billion which was the cost of his mistake.
I do not know about Chancellor Kwarteng’s counting skills but I would suggest Jess starts with her own. For example the £65 billion figure is wrong as several days into the scheme we have spent £3.7 billion with only £22 million added yesterday, So even if we spent the maximum £5 billion on the remaining days of this scheme we would be well short of that. Also on a mark to market basis it is currently in profit.
What has happened is that partly by luck ( US bond yields have fallen pulling ours lower) and partly because the issue was self-fulfilling as pension funds acting made it worse for other pension funds, the situation has calmed and the market rallied. There are two deeper questions here which have been ignored in the furore. The first is one of my themes which is can we ever escape QE? The second is that much of the game here has been the implicit point that the Bank of England is offering a type of put option on the market. If we go to certain levels it will intervene. That brings me back to a point I make often, why so we never address the issue of why do we need so much intervention/help?
The issue of what will happen to the plans for bond sales is left a bit hanging in the air. I note they are still planned to start before the next MPC meeting.
The first APF gilt sale operations will now take place on 31 October and proceed thereafter. The schedule for operations for Q4 2022 will be announced in due course.
The MPC’s annual target of an £80bn stock reduction in gilts held in the APF is unaffected and unchanged.
They are probably already regretting not making the date after the next meeting. I would not be surprised if the whole idea is quietly abandoned, but events are moving quickly meaning even the end of the month is a long way away in financial market terms.
Mortgage Rates
It looks as though we are beginning to see a turn here too which is related to the bond yield points I have made above. As I type this the five-year yield has pulled back to 4%. Daily moves can of course change but I have the feeling that just as the media have caught up with the push for higher mortgage rates last week the trend is now the other way.
Comment
In fact some real food for thought for the Bank of England came from a land down under this morning. It may well be the first signal of something I have been suggesting for months now.
At its meeting today, the Board decided to increase the cash rate target by 25 basis points to 2.60 per cent. It also increased the interest rate on Exchange Settlement balances by 25 basis points to 2.50 per cent ( Reserve Bank of Australia)
Are central bankers having second thoughts? Well there is a hint here.
The cash rate has been increased substantially in a short period of time. Reflecting this, the Board decided to increase the cash rate by 25 basis points this month as it assesses the outlook for inflation and economic growth in Australia.
This reminds me of a song by The Specials.
You’ve done too much,Much too youngNow you’re married with a sonWhen you should be having fun with me
Also I look for contradictions and here is a clear one.
Today’s increase in interest rates will help achieve this goal and further increases are likely to be required over the period ahead.
If they really believe that why have the only raised by 0.25% when only a week or two ago the benchmark was 0.75%? We can continue with the contradictions as I note they have added this bit.
One source of uncertainty is the outlook for the global economy, which has deteriorated recently.
Notayesmanseconomics's Blog 
“One source of uncertainty is the outlook for the global economy, which has deteriorated recently.”
It has and this will weaken bond yields which in turn will set mortgage rates lower. But one swallow doesn’t make a summer and a lot can happen in a week or two, North Korea has launched a balistic missile over North Japan and Putin keeps making nuclear threats all which can unnerve markets.
But the world economy is deteriorating and it will be difficult to pull back with so much world debt accrued. What has happened since 2008 is assets have risen significantly and in a deteriorating global economy they are at risk.
However the UK footsie up 2% today and the £ against the dollar higher so most people are happy today !
Will it last ? I doubt it.
Hi Peter
Sentiment was certainly turned by the move from The RBA. The retreat of the US Dollar has brought the Euro back to almost parity again. We seem to keep ending up there.
It is impossible to reverse QE and on this hill I shall die.
Hi bill
I doubt you will have to die on that hill. For a start I rather suspect you will not be short of company,
It;s my view that we, for just a second, ignore the actions of bankers etc. & have a look at the other factors which will affect the economy in future months:
1) Food inflation: not manufacturing fertiliser because of costs, means no by-products, like CO2, which we saw in yesterday’s post by Peter Pan has led to a 3000% increase in cost. This alone will mean, according to some, a rise of 18% in food/drinks prices. Furthermore, aluminium production, which is energy expensive, is reckoned to be down by half, & that will further affect canned food & drinks.
Obviously the lack of fertiliser produced will impact on the amount of food produced, so I can see food inflation of ANOTHER 30% over the coming year.
2) The regulator OFGEM has issue a warning that the UK faces a significant risk of gas supply shortages. I’d imagine that the problem starts well before we have none, with the grid needing to supply at a constant level to be safe. This may well mean gas-outs, & when they happen, many will use electrical heating as an alternative, & that will put huge strain on that grid too. In order to keep to the gov’t’s £2500 threshold, it may have to pay suppliers far more than expected, meaning far more money borrowed to pay for it, causing a need for further interest rate rises to keep down inflation, or keeping to subsidy guidelines, effectively abandoning the £2500 price “cap”. Incurring further energy price inflation, although the amount is difficult to quantify, could mean the original OFGEM cap of £3549.
Either would be inflationary with the prospect of up to 40% energy inflation.
3) Shelter inflation.
Unfortunately, the fight against other inflation causes the need for higher interest rates, meaning that those on SVR mortgages & those who need to refix, seeing their mortgage costs double or more.
Further, since that is likely to cause market correction which, after years of bubble economics, could be severe.
There is talk of 20-30% reduction in house prices, but elsewhere, when the property bubble has burst (Spain or Ireland for example) house prices have halved.
Let’s look at the distinct possibility of people who thought they were sitting pretty having bought their homes a few years ago @ say £300k which now has a market value 50% higher call it £450k. Now take a third off that, we’re back to £300k with the only equity in the house being whatever has been paid off the mortgage.
Not likely to be 10%, which is the minimum equity threshold for re-mortgaging. Go directly to SVR hell.
Worse still, some may have used that equity to trade up, hoping to have room for additions to the family: that really could be a nightmare.
My view is, THE GAME’S UP!!!
Very few can withstand the triple-onslaught that there is the very real prospect of us having to face, & bailing out those who are going to suffer will just hasten the inflationary death spiral.
That all necessities are inflating at once is not chance.
TPTB have engineered a crisis from which, in their view, the only escape is a Great Reset.
I’d be most grateful if anyone can pick holes in the possibility of this scenario coming about, as it’s not making me at all happy.
Have tried to send my response buz late this morning but it is awaiting approval !!!
Not really to pick holes but to add to your post.
In the meantime even the FT are critical of the GOV policies and concern as to whether they will raise benefits with inflation. The poor are getting poorer with high rents I suspect many families will have to subisidise their rents as housing benefit will be short. More and more people are having to go to food banks and there is now less food at food banks. The poor are getting poorer and this iis a fact while the rich are getting richer. I have expressed that on this forum a number of times but this article says it is not the way to run and economy.
https://www.ft.com/content/3fb982c2-792e-496f-8488-237f43fc2db7
Remember, benefits are not to help the poor; they are to protect the rich from the poor.
Peter Pan, if one put more than two links in with one’s response, then it can get caught like that.
If your post has more than two links, post it again in two parts.
In reply to your article, give ten grand to a rich man & he’ll put it on his pile.
Give ten quid each to a thousand poor men, they’ll spend the lot
Thanks for that I think I had about 3 links but hey ho I will learn next time.
Hi Peter
I have found it and let it through
Not certain I will pick holes in you post but add my penny worth:
1) We have already had quite high food inflation which most people would say was between 10-30% the lat year but some supermarkets have tried to absorb the costs but it does depend what you eat. You are fortunate growing some of your own food but still have to buy fertilizer which has shot up in price. Whether we see another 30% I hope not as even supermarkets are cutting waste and that means less for food banks
https://www.bbc.co.uk/news/business-63122864
Baltic dry index has come off the bottom and rising quickly again which will add to imported inflation
https://tradingeconomics.com/commodity/baltic Danny Blanchflower saying inflation was transitory may be a bit premature and in fact it looks to me like it may become embedded.
2) I had hoped with the price cap most households would be protected this winter but the GOV giving a warning on supply issues is a concern. It is also a concern to business particularly if you have a factory and the gas supply was cut.
3) Despite bond yields falling mortgage rates are still rising and more will put up their rates tomorrow says the BBC
https://www.bbc.co.uk/news/business-63131509
With interest rates rising it will put a damper on consumer spending which is expected to be poorer this Christmas and peole expected to spend 4.4 billion than they did last year a massive fall of -22%.
Christmas is going to feel like Hell for some people and when the money runs out the divorce rate climbs.
Despite the Chancellor doing a U turn on the top rate of tax the damage has been done, the £ may have had a good pull back the last few days but is weakening again as I reply to your post.
I grow comfrey & harvest seaweed, I also have access to as much animal manure as I can use.
My fertiliser costs are ZERO.
Can’t see anything wrong – you will own nothing and you will be happy.
Their plans are working out so well they don’t even try to conceal them anymore and openly brag about them, when you point this out to people they look at you like YOU are the mad person when they are denying the collapse of the country’s economy, currency and energy infrastructure has been planned even when you explain the policies that have led to it!
Closing down the country’s power stations and replacing them with renewables that don’t come even close to replacing the lost capacity, shutting the Keystone Xl pipeline, refusal of new liceses to explore and drill for oil and gas, forcing war in Ukraine to jeopordize gas supplies to Europe then blowing uo Nordstream 1 and 2 pipelines, keeping rates too low for too long to create bond and asset bubbles that are guranteed to collapse when raising rates, its all happening, yet to them its just…… a coincidence!.
Remeber Bernanke’s speech apologising for the Fed’s role in the Great Depression???(it raised rates into the depression making it even worse) – he said we’re sorry – we won’t do it again, then proceeded to do QE and ZIRP to prove it. But what are they doing now? Raising rates into a depression!, but this time the amount of government and personal debt is way more than that held in the 1930’s so the damage will be much greater.
The government has two weeks until the bond market starts pricing long gilts again, will yields keep going up thereby bankrupting the UK pension system or will they start buying them again thereby making it a permanent underwriting obligation, what next? buying short dated gilts to prevent mortgage rates from going up???thereby ensuring the end of the pound, all our predictions on here are coming true, there are only bad choices ahead and the Bank of England cannot keep this rotten corrupt economy afloat anymore.
buz I will have another go this is my pennyworth on your post:
1) I hope we dont see another 30% the £ has risen but we get most of our food from outside the US so that wont make much of a difference
2) A gas cut could hit some business particularly bad such as factories with a furnace which could lead to lay offs.
3) Mortgages still rising and more so set to put their rates up tomorrow, the damage has been done with Truss ill thought out tax cuts which she had to do a U turn on.
https://www.bbc.co.uk/news/business-63131509
Outlook doesn’t look good the £ may have rebounded strongly but I suspect it won’t last.
Many furnaces can’t be shut down temporarily.
I know that when the furnaces at Ravenscraig in Motherwell were shut down, it was permanently, as when they cooled, they shrank & cracked, rendering them useless.
The obvious other problem with gas outs is that if there is no pilot flame, turning the gas back on is extremely dangerous.
Truss in talks with Norway to secure gas for next 20 years
https://www.cityam.com/government-chases-gas-deals-with-norway-amid-supply-crunch-fears/
Isn’t it a bit risky securing deals up to 20 years?
So what about our own gas in both North Sea and fracking?
Not only that tapping our own supply will create jobs in the UK.
Hi Peter
The risk I would say is that we lock ourselves into the present high prices. On the other hand we have a lot of links with Norway so some sort of deal is sensible.