This has been a bad week for the Governor of the Bank of England Mark Carney. First came the appointment of Professor Silvana Tenreyro to the Monetary Policy Committee which led to even social media to have a brief period of silence as everyone looked up who she was! Next came a reminder that his Chief Economist Andy Haldane is a modern version of a “loose cannon on the decks” on the edge of going off in almost any direction at any time. Finally last night came a critique from someone Governor Carney went out of his way ( North America) to appoint.
Ms Forbes has given quite a damning account of her time at the Bank of England whilst also confirming several themes of this website.
In July 2014, when I started on the Bank of England’s Monetary Policy Committee, it was widely expected (including by me) that we would begin increasing interest rates soon. It has been almost three years – and growth has averaged a healthy and above trend 2.3% (year-on-year) over this period. Yet interest rates are now lower – instead of higher – than when I started my term.
Fair play to her for the honesty but of course regular readers will be aware that I forecast this outcome back then. The establishment continue only to talk to themselves which is why we get the phrase “widely expected” when they are wrong as they live in an echo chamber. It is an irony that they try to wear the badge of diversity when in fact it is diversity of ideas that they most need and of course they shun.
Ms Forbes continues to land punches on the Bank of England consensus as another of the themes here the woeful forecasting record gets a mention.
A key justification for the large amount of stimulus that many people (albeit not me) supported in August was a forecast for a sharp contraction in growth to near recession levels and sharp increase in unemployment that would leave a meaningful increase in the number of people without a job. That forecast has not materialized.
As I wrote at the time this was perfectly predictable if you looked at the impact of falls in the value of the UK Pound £ which as a reminder is currently equivalent to a 2.75% cut in Bank Rate. If I was to make a one sentence critique of bringing members of the “international economic elite” to the Bank of England it would be that they invariable fail to understand the impact of changes in the UK Pound £. I write that in sad fashion in this instance because it looked for a time that Kristin Forbes did understand.
After the uppercut comes the left cross.
And as the UK economy has held up well since the Brexit vote, why has there been no consensus to tighten
monetary policy – or at least slightly reduce the substantial amount of stimulus provided in August – since
So she thinks that the Bank of England is full of “Carney’s Cronies” as I have labeled them too?
a majority on the MPC does not support reversing a small portion of last August’s stimulus.
As an aside it is also revealing that even she does not seem to in the words of Blockbuster by Sweet “have a clue what to do” about all the QE. Back in September 2013 I wrote an article in City-AM with a suggestion on this front. Returning to the economic theme she points out that the world has changed at least according to the Bank of England so why has policy not changed?
Instead, over the three full quarters since the referendum, GDP has increased by over three times more (by almost 1 percentage point more) than forecast in the August Inflation Report, and unemployment is 0.5 percentage points lower. Put slightly differently, instead of increasing, unemployment has fallen so much that it is now at its lowest level in over 40 years. At the same time, inflation spiked to 2.9% in May. It is expected to continue increasing over the next few months and remain above target for
over three years.
It has been argued by some by the previous Governor Baron King of Lothbury intimidated some MPC members so as you read this next quote please be aware that his term ended in the summer of 2013 as Mark Carney arrived.
This pattern of different views and dissent by all types of committee members, however, seems to have
changed around 2013 – a period when there were a number of changes at the Bank and to the MPC’s remit,
making it hard to pinpoint the cause……… Not a single dissent since 2013 has come from an internal member.
Finally it would appear that someone at the Bank of England has caught up with a point I have been making since the EU Referendum vote.
Sterling’s recent depreciation appears to be shifting the trend component of UK inflation upward quickly, potentially generating more persistent inflationary pressures
This is all rather different to what Governor Carney told us at Mansion House.
This stimulus is working. Credit is widely available, the cost of borrowing is near record lows, the economy has outperformed expectations, and unemployment has reached a 40 year low.
Loose cannon on the decks
For those unaware this saying came from the Royal Navy where in the days of sailing ships a loose cannon was extremely dangerous to say the least. A modern version of this has been the Chief Economist of the Bank of England Andy Haldane which we can see by a simple game of then and now. First just over 11 months ago.
In my personal view, this means a material easing of monetary policy is likely to be needed,…….Put differently, I would rather run the risk of taking a sledgehammer to crack a nut than taking a miniature rock hammer to tunnel my way out of prison…….Given the scale of insurance required, a package of mutually-complementary monetary policy easing measures is likely to be necessary.
And this week.
I considered the case for a rate rise at the MPC’s June meeting.
As ever there is no real confession here about being wrong. After all if Andy had built a plane and it crashed on take-off who would fly on one of his planes again? But the central banking echo chamber is not like that even when they present devastating evidence of their own failure.
Wages have been surprisingly weak for much of the period since the global financial crisis. Chart 1 plots
successive Bank of England forecasts of wage growth since 2012. Wage growth in the UK has persistently
disappointed to the downside, on average by around 1 ¼ percentage points one year ahead.
You see our “loose cannon” knew this last August albeit a year less of it yet he still ignored his own frailties and ploughed ahead in that combination of arrogance and panic that we see from the central banking fraternity at such times. Yet in spite of such failure look what happened only last week.
Andrew Haldane, Executive Director, Monetary Analysis and Statistics, and Chief Economist at the Bank of England, has been reappointed for a further three-year term as a member of the Monetary Policy Committee with effect from 12 June 2017.
Rewards for failure indeed. As I asked at the time on what ground was he reappointed please?
There is much to consider here as the themes of the Bank of England being the worst forecasting organisation in the world and the advent of “Carney’s Cronies” have been in play. However in the speech by Kristin Forbes there was also a confession of the earliest theme of this website so let us get to it.
Even more striking is the lack of other countries’ ability to sustain any tightening in monetary policy since the
They are in their own junkie culture style trap but as it is Glastonbury weekend let me hand you over to Muse for a description.
I wanted freedom
Bound and restricted
I tried to give you up
But I’m addicted
Now that you know I’m trapped sense of elation
You’d never dream of
Breaking this fixation
You will squeeze the life out of me