Yesterday gave us another opportunity to discover what a Bank of England policy maker is thinking. This was because former hedge fund manager Gertjan Vlieghe gave a speech at the headquarters of Bloomberg in London in . Sadly Gertjan is yet another policy member of the Bank of England who has had trouble with his ethical radar. From the Guardian in July 2015.
“Despite the fact that there would be no conflict of interest between my future role and any continued passive stake in Brevan Howard, we have now come to an agreement whereby I shall be bought out of my remaining interest in the partnership before taking up my position on the MPC. As of 31 August I will have severed all financial and other ties with Brevan Howard. I have taken this step to avoid any mistaken impression of a conflict of interest,” said Vlieghe.
If Gertjan had wanted to avoid the impression that he was focused on the City of London perhaps Bloomberg was not the best place to give his speech.
What did he say?
Gertjan is obviously troubled by the fact that the Bank of England got the post EU leave vote economic forecasts wrong.
I will argue that there is an important distinction to be drawn between good monetary policy and making accurate forecasts………..And there have been times, just recently, when forecast errors were small and policy was broadly right.
Ah so he was right by being wrong apparently! If we go back to August we were told this by the Bank of England in the monetary policy minutes.
the outlook for growth in the short to medium term has weakened markedly.
Now the medium term has yet to happen but in the short-term the error was not small as the UK economy mimicked the film “Carry on Regardless” . If you had looked at economic growth without knowing about the referendum vote you would have seen 2016 as a pretty constant year.
Staying with the forecasting problem Gertjan is keen to put in our minds the view that it does not matter.
But the existence of forecast errors per se, whether large or small, is not necessarily a sign of either wrong policy or of using the wrong framework
Also in an increasingly desperate effort he tries to claim that it was unpredictable.
Sometimes forecast errors simply tell you things happened that could not have been foreseen.
All you have to do is look back to last summer on this website when I pointed out the powerful effect of the then lower UK Pound £. Either Gertjan is not aware of that or he chose to ignore it.
Also if we step back for a moment Gertjan also offers a critique of his own policy because this below is one of his own central planning policies.
We only have an imperfect notion of how the economy works, we only have partial information about the state of the economy at any point in time, and the economy is constantly hit by unanticipated shocks.
Yet he charged in with policy easing on August 4th 2016 anyway. Apparently as he splashed around in his speech this policy easing was the equivalent of this from a doctor.
a doctor can perform life-saving procedures, such as administering blood-thinning medication, widening the coronary artery, or performing a coronary artery bypass.
What about policy then?
This is where the forecast errors came in as Gertjan explains his thinking back then.
First and foremost, short-term indicators of the economy, such as business surveys, consumer confidence, housing indicators, had turned down sharply. We always monitor published data that, historically, has given a decent but not perfect signal of where the economy is heading in the near term . And these data were falling rapidly in the immediate aftermath of the referendum. For example, the Composite PMI, an indicator of business activity growth, had fallen to its lowest level since 2009.
He then makes another step.
actual published data on economic activity and uncertainty
You see if you look at what he was using yes they were published but in the main they were sentiment indicators rather than actual numbers. Acting on sentiment is of course a feature of a hedge fund manager but a central banker faces many other issues.
If we add into this that Gertjan seems a naturally gloomy chap then an easing was on the cards.
I already saw considerable weakness in nominal growth as we headed into the referendum, and I was starting to think the economy might need more stimulus even in the status quo scenario of a remain vote.
We have gone from expecting a short and sharp slowing, to pencilling a much milder and more protracted slowing.
Indeed he is so troubled by accusations that he is gloomy he feels the need to deny it.
My main point regarding our August forecast is that we were not possessed by some innate feeling of gloom,
This gloom led Gertjan to being completely wrong.
we put in place a stimulus package in August, of a 25bp Bank Rate cut, a funding scheme to make sure the rate cut was passed on, additional gilt purchases, and corporate bond purchases……. I thought our August package would be the start, and further stimulus would be needed.
Not only was that completely wrong the Forward Guidance ( to the November meeting) was wrong as well.
We get four explanations of why he was wrong and none of them mention the impact of the UK Pound £ so having given him the benefit of the doubt at the beginning I do not do so now. This is rather poor. Also his claim of a “fiscal reset” is contradicted by the UK fiscal statistics as I have reported on here.
Oddly the lower exchange rate now does get a mention! Accordingly we will get higher inflation and there is also a mention which if you blink you will miss of an economic boost too. But of course gloomy Gertjan has a couple of other things to worry about. The first is wage growth.
Let’s be clear, wage growth has picked up somewhat from the sub-1% pace in 2013 and 2014, but not nearly as much as we had expected, given the fall in the unemployment rate
Ah another forecasting error. Anyway this will lead to a consumer slow down.
The consumer slowdown, which initially did not materialise, now appears to be underway…….. I think the slowdown is more likely to intensify than fade away.
Added to this I note that the inflation will be in Gertjan’s words.
Inflation is set to rise, but that seems entirely accounted for by exchange rate pass-through, which, although persistent, will ultimately fade as long as inflation expectations remain well anchored.
Of course we all ultimately fade along the lines of the famous statement by JM Keynes “In the long run we are all dead” but I have no idea how that helps in the intervening period.
Gloomy Gertjan seems to be in denial here. He placed his faith in the wrong factors last August and made a mistake based on unsurprisingly for him a gloomy forecast. Is it not intriguing to wonder why a financial sector insider ( ex-hedge fund manager) is so gloomy? Of course we can add to that the issue of why the Bank of England needed another representative of the financial sector onboard?
Sooner or later he will be right as of course economic slow downs eventually arrive a like a watch that has stopped gloomy Gertjan will then claim he was right all along. But in his speech was a single sentence which explains in my opinion where he has gone wrong.
Until mid-2016, inflation was close to zero, courtesy of the earlier drop in oil prices and the strength of sterling. That meant that real household labour income growth was close to 3%, despite subdued nominal wage growth.
Lower inflation led to an economic boost via stronger real wage growth so in my opinion the objective is to keep inflation low, as wage growth seems set to be subdued. However whilst claiming he has provided an economic boost the expectation and then arrival of the Bank of England easing last August pushed the Pound £ lower and inflation higher. Thus via the real wage effect the likelihood is that gloomy Gertjan has created his own future gloom by repeating the errors made in 2010/11. If he continues on that road he will probably cut Bank Rate again in spite of his talk of a rise.
Also if we continue his rather bizarre medical analogy the side-effects are growing.
Consumer credit growth has been accelerating over the past few years, and has accelerated further in the second half of last year, suggesting that the resilience of household spending was in part financed by credit,
We have been through a phase where prices have risen and chocolate bars have suffered from shrinkflation due to higher costs and a lower £ .Well there is this.
Cocoa futures in London have slumped by about a third since reaching a six-year high in July. ( Bloomberg).
Any chance of an extra Toblerone triangle?
Me on TipTV Finance