Yesterday was not one of the better days for the Bank of England. To explain why let us take the advice of Kylie Minogue and step back in time. We go back to its house journal or the economics editor of the Financial Times Chris Giles on the 22nd of March.
The Bank of England has set the stage for an interest rate rise at its meeting in May, saying that pay growth was picking up and inflation was expected to remain above its 2 per cent target.
For Chris this was an example of deja vu and another success on its way for Forward Guidance.
Michael Saunders and Ian McCafferty broke ranks and voted for an immediate increase in interest rates, in a replay of events last September, when their dissenting views foreshadowed the MPC’s policy tightening announced in November.
The hits kept coming for the rise in May and go away camp.
The remaining seven MPC members argued that while nothing had changed significantly enough since the February meeting to justify an immediate move, they still believed rates would have to rise faster than markets had expected at the last meeting.
So the view advanced that an interest-rate rise in May was pretty much a done deal and markets moved towards suggesting a 90% chance of it. This was further reinforced by a speech given by Gertjan Vlieghe which I have mentioned before. From April 6th.
But last month Gertjan Vlieghe, an external MPC member, broke ranks with his colleagues on the nine-member committee when he said that rates could rise above 2 per cent over the same period.
So the stage was set and if there was a warning from the FT it was heavily coded and looked at something else.
The Riksbank has had some difficulties with its predictions. Until last year, it had been persistently over-optimistic about its ability to raise interest rates, always expecting rates to start rising soon
A bit like the England batsman James Vince who plays some flashy eye-catching shots but then gets out in the same familiar fashion.
Unfortunately for Governor Carney all his troubles were not so far away and it looked as though they were about to stay. He gave an interview to the BBC.
The governor of the Bank of England has said that an interest rate rise is “likely” this year, but any increases will be gradual.
Mark Carney said major decisions had to be taken on Brexit, including on the detail of the implementation period and the shape of a final deal.
There would also be a parliamentary vote on the future relationship between Britain and rest of the EU.
All those events would weigh on how fast interest rates rises would occur.
This poses more than a few problems. Firstly there is the issue of Brexit about which of course there are opposite views. But whichever side of the fence you are on the truth is that the water has been much less choppy recently so the Governor is flying a false flag. This adds to the problem he has in this area because he has been consistently too pessimistic on this subject, From the Guardian in May 2016.
That would leave the Bank with a difficult balancing act as it decides whether to cut, hold or raise interest rates to counter opposing forces, Carney added.
Of course the difficult balancing act suddenly became cut as fast as he could with a promise of a further cut that November which was later abandoned. This contrasts in polar fashion with the pace at which interest-rate increases arrive as we are still waiting for the one promised back in the summer of 2014. From the Wall Street Journal.
Bank of England Gov. Mark Carney said Thursday that interest rates in the U.K. could rise sooner than investors expect, sending the clearest signal yet that Britain’s central bank is inching closer to calling time on five years of record-low borrowing costs.
Well not that clear as it turned out to be comfortably numb.
A distant ship, smoke on the horizon
You are only coming through in waves
This was something which created quite a disturbance in the markets as they scrambled to move interest-rate and bond futures. It is easy to forget now but the words of Governor Carney caused quite a bit of damage as the move eventually reversed. Also there was this.
And he warned the BOE intends to be vigilant over any risks to the recovery emanating from the housing market, where rising prices are stoking fears that Britons could become too indebted.
Term Funding Scheme. Our Term Funding Scheme (TFS) provides funding to banks and building societies at rates close to Bank Rate. It is designed to encourage them to reflect cuts in Bank Rate in the interest rates faced by households and businesses.
Oh sorry not that £127 billion one nor the extra £60 billion of QE Gilt purchases. anyway as there is nothing to see here let;s move along.
This issue is something which just gets ever more breathtaking so let me take you to the Bank of England Minutes.
All members agree that any future increases in Bank Rate are likely to be at a gradual pace and to a limited extent.
The problem here is that whilst this is repeated by the media like a mantra nobody points out that we have had years of such hints and promises now with us remaining at the “emergency” Bank Rate of 0.5%. We did of course get a panic cut in the summer of 2016 followed after what was considered to be a suitable delay to avoid embarrassment an overdue reversal but no increases at all.I am reminded of the explanation of what minutes mean by the apochryphal civil servant Sir Humphrey Appleby which was along the lines of “Whatever you want” from Status Quo, But feel that this from June 2014 was more accurate.
Part of that normalisation would be a rise in Bank
Rate at some point
The some point has never arrived but of course the hot air rhetoric carries on regardless. From Bloomberg.
Bank of England Governor Mark Carney says the U.K. should prepare for a few interest-rate increases over the next few years.
Perhaps he means after June 2019 when he leaves.
We find ourselves looking at a familiar theme which is the woeful forecasting record of the Bank of England. In this instance we see that it has changed its mid again about pay growth and inflation if we look through the Brexit inspired smokescreen. This matters because the present Governor Mark Carney has placed enormous emphasis on so-called Forward Guidance which of course has turned out to be anything but. It is a feature of his tenure that he is a dedicated follower of fashion but in his private moments he must regret following that particular central banking one. His forward guidance on climate change also has its troubles.
Carney said in the comments, made on the sidelines of the International Monetary Fund meetings in Washington.
This morning another member of the Bank of England Michael Saunders has demonstrated what a land of confusion they live in.
because the economy’s response to
changes in interest rates, especially rises, is more uncertain than usual.
Is it? Maybe one day we will find out! Also there is this rather bizarre statement and the emphasis is mine.
He also discusses why any further tightening is likely to be at a gradual pace and to a limited extent.
So there you have it. As to the decision well the Bank of England has led itself and the markets up the garden path and now is having second thoughts. The real problem is not the current view which is more realistic but why it keeps being wrong?
A new Governor?
An ability not to see anything inconvenient seems a good start and of course the ability to deny almost anything would be of great help. Some have suggested he has gone because he wants to be in Europe next season but personally I think we should remember the positive influence he brought to English football in the early days. A big change to the drinking and eating cultures for a start.