The morning has bought some better news for the UK economy which is welcome in these pandemic driven hard times. However it has been something of a problem for the Bank of England which tripped up yesterday. It decided to send a signal to markets via this section from its Monetary Policy Committee meeting Minutes.
The Committee had discussed its policy toolkit, and the effectiveness of negative policy rates in particular,
in the August Monetary Policy Report, in light of the decline in global equilibrium interest rates over a number of
years. Subsequently, the MPC had been briefed on the Bank of England’s plans to explore how a negative
Bank Rate could be implemented effectively, should the outlook for inflation and output warrant it at some point
during this period of low equilibrium rates. The Bank of England and the Prudential Regulation Authority will
begin structured engagement on the operational considerations in 2020 Q4.
We learn something from the language as the group of people who have cut interest-rates describe it as “the decline in global equilibrium interest rates over a number of
years.” So we immediately learn that they do not think it has gone well as otherwise they would be taking the credit themselves. After all if it is really like that then they are redundant and we could use a formula to set interest-rates.
Next comes something which is perhaps even more embarrassing which is that only now around 6 months after the pandemic peak ( which in economics terms was March 19th) have they been briefed on implementing negative interest-rates. What have they been doing? I would have expected it in the first week if not on day one. For the reasons I have explained over time on here I would vote no given such a chance, but at least I know that and I also know why I think that.
Finally they will wait until the next quarter to discuss it with the Prudential Regulation Authority?
The Economic Outlook
There was a conceptual problem with all of this because the view as expressed in the Minutes was that the economy was doing better than they have previously thought.
For 2020 Q3 as a whole, Bank staff expected GDP to be around 7% below its 2019 Q4 level, less weak
than had been expected in the August Report.
This brings us back to the issues I have raised above. Why did they not prepare for negative interest-rates where the outlook was worse than now?
UK Retail Sales
Things got better for us but worse for the Bank of England this morning as the retail sales numbers were released.
In August 2020, retail sales volumes increased by 0.8% when compared with July; this is the fourth consecutive month of growth, resulting in an increase of 4.0% when compared with February’s pre-pandemic level.
The UK shopper has returned to his/her pattern of growth and ironically we are now doing better than the previous period because if you recall annual growth was dropping then whereas now we have solid growth.
Indeed there was even more woe for the inflationistas at the Bank of England in the detail.
In August, retail sales values increased by 0.7% when compared with July and 2.5% when compared with February.
The amount spent is lower than the volume increase meaning that prices have fallen. This is another piece of evidence for the argument I first made on here on the 29th of January 2015 that lower prices led to higher sales volumes. Meanwhile the Bank of England is trying to raise prices.
The MPC’s remit is clear that the inflation target applies at all times, reflecting the primacy of price stability in the
UK monetary policy framework.
Actually they are also not telling the truth as raising prices by 2% per annum would not only reduce any retail sales growth it is not price stability. It is very sad that the present policy is to pick policymakers who all toe the party line rather than some who think for themselves. The whole point of having external members has been wasted as the Bank of England has in effected reverted to being an operating arm of HM Treasury.
Retail Sales Detail
The obvious question is to ask why is the retail sector exemplified by the high street in such trouble?The report does give insight into that.
In August, there was a mixed picture within the different store types as non-store retailing volumes were 38.9% above February, while clothing stores were still 15.9% below February’s pre-pandemic levels.
As you can see there has been quite a shift there and it is not the only one. Fuel volumes are still only at 91.3% of the February level. That is somewhat surprising from the perspective of Battersea but there is context from the issue with Hammersmith Bridge and now Vauxhall Bridge.
Also one area and I am sure you have guessed it has seen quite a boom.
Looking at the year-on-year growth in Table 2, total retail sales increased by 51.6%, with strong increases across all sectors. This shows that while we see declines on the month, online sales were at significantly higher levels than the previous year.
We have fallen back from the peak but the trend was up anyway as pre pandemic volumes were around 50% higher than in 2016. In August they were 125.9% higher than in 2016.
Eat Out To Help Out
In case you were wondering this was not part of the growth today and may well have subtracted from it according to The Guardian.
Britons spent £155m less in supermarkets in August than in the previous month as many returned to workplaces and the government’s eat out to help out scheme encouraged visiting restaurants and cafes.
Alcohol sales in supermarkets dipped month on month, with wine down 5% and beer down 10%, as the scheme encouraged people to swap Zoom catch-ups for trips to bars and restaurants, according to market research firm Kantar.
It has been a curious 24 hours when our central banking overlords have displayed their leaden footedness. The issue of negative interest-rates is something we have been prepared for and with both the UK 2 and 5 year bond yields already negative markets have adjusted to. For a while the UK Pound £ fell and the bond market rallied but the Pound has rallied again. So what was the point?
Also as Joumanna Bercetche of CNBC reminded me Governor Andrew Bailey told her this on the 16th of March.
On negative interest rates – Evaluated the impact on banks/ bldg societies carefully “there is a reason we cut 15bps”. Bailey: “I am not a fan of negative interest rates and they are not a tool I would want to use readily”. Banks are in position to support the economy.
Never believe anything until it is officially denied……