The problems of the boy who keeps crying wolf

Yesterday saw the policy announcement of the Bank of England with quite a few familiar traits on display. However we did see something rather familiar in the press conference from its Governor Mark Carney.

The Committee judges that, given the assumptions underlying its projections, including the closure of drawdown period of the TFS and the recent prudential decisions of the FPC and PRA, some tightening of monetary policy would be required in order to achieve a sustainable
return of inflation to target.

Yes he is giving us Forward Guidance about an interest-rate rise again. In fact there was more of this later.

Specifically, if the economy follows a path broadly consistent with the August central projection, then monetary policy could need to be tightened by a somewhat greater extent over the forecast period than the path implied by the yield curve underlying those projections.

Yep not only is he promising an interest-rate rise but he is suggesting that there will be several of them. Actually that is more hype than substance because you see even if you look out to the ten-year Gilt yield you only get to 1.16% and the five-year is only 0.54% so exceeding that is really rather easy. Also as I have pointed out before Governor Carney covers all the bases by contradicting himself in the same speech.

Any increases in Bank Rate would be expected to be at a gradual pace and to a limited extent

So more suddenly becomes less or something like that.

Just like deja vu all over again

If we follow the advice of Kylie and step back in time to the Mansion House speech of 2014 we heard this from Governor Carney.

This has implications for the timing, pace and degree of Bank Rate increases.

There’s already great speculation about the exact timing of the first rate hike and this decision is becoming more balanced.

It could happen sooner than markets currently expect.

The print on the screen does not convey how this was received as such statements are taken as being from a coded language especially if you add in this bit.

Growth has been much stronger and unemployment has fallen much faster than either we or anyone else expected at last year’s Mansion House dinner.

Markets heard that growth had been better and that the Bank of England was planning a Bank Rate rise in the near future followed by a series of them. Tucked away was something which has become ever more familiar.

 we expect that eventual increases in Bank Rate will be gradual and limited

Although to be fair this bit was kind of right.

The MPC has rightly stressed that the timing of the first Bank Rate increase is less important than the path thereafter

Indeed the first Bank Rate increase was so unimportant it never took place.

Ben Broadbent

he has reinforced the new Forward Guidance this morning. Here is the Financial Times view of what he said on BBC Radio 5 live.

“There may be some possibility for interest rates to go up a little,” said Mr Broadbent.

It sounds as though Deputy Governor Broadbent is hardly convinced. This is in spite of the fact he repeated a line from the Governor that is so extraordinary the press corps should be ashamed they did not challenge it.

adding the economy was now better placed to withstand its first interest rate rise since the financial crisis…….Speaking to BBC radio, Mr Broadbent said the UK was able to handle a rate rise “a little bit” better as the economy is still growing, unemployment is at a more than 40-year low, and wages are forecast to rise.

Sadly for Ben he is acting like the absent-minded professor he so resembles. After all on that score he should have raised interest-rates last summer when growth was a fair bit higher than now.Sadly for Ben he voted to cut them! In addition to this there is a much more fundamental point which is if we are in better shape for rate rises why do we have one which is below the 0.5% that was supposed to be an emergency rate and of course was called the “lower bound” by Governor Carney?

Forecasting failures

These are in addition to the Forward Guidance debacle but if we look at the labour market we see a major cause. Although he tried to cover it in a form of Brexit wrap there was something very familiar yesterday from Governor Carney. From the Guardian.

 

We are picking up across the country that there is an element of Brexit uncertainty that is affecting wage bargaining.
Some firms, potentially a material number of firms, are less willing to give bigger pay rises given it’s not as clear what their market access will be over the next few years.

Actually the Bank of England has been over optimistic on wages time and time again including before more than a few really believed there would be a Brexit vote. This is linked to its forecasting failures on the quantity labour market numbers. Remember phase one of Forward Guidance where an unemployment rate of 7% was considered significant? That lasted about six months as the rate in a welcome move quickly dropped below it. This meant that the Ivory Tower theorists at the Bank of England immediately plugged this into their creaking antiquated models and decided that wages would rise in response. They didn’t and history since has involved the equivalent of any of us pressing repeat on our MP3 players or I-pods. As we get according to the Four Tops.

It’s the same old song
But with a different meaning

Number Crunching

This was reported across the media with what would have been described in the Yes Minister stories and TV series as the “utmost seriousness”. From the BBC.

It edged this year’s growth forecast down to 1.7% from its previous forecast of 1.9% made in May. It also cut its forecast for 2018 from 1.7% to 1.6%.

Now does anybody actually believe that the Bank of England can forecast GDP growth to 0.1%? For a start GDP in truth cannot be measured to that form of accuracy but an organisation which as I explained earlier has continuously got both wages and unemployment wrong should be near the bottom of the list as something we should rely on.

Comment

There is something else to consider about Governor Carney. I have suggested in the past that in the end Bank of England Governors have a sort of fall back position which involves a lower level for the UK Pound £. What happened after his announcements yesterday?

Sterling is now trading at just €1.106, down from €1.20 this morning, as traders respond to the Bank of England’s downgraded forecasts for growth and wages…..The pound has also dropped further against the US dollar to $1.3127, more than a cent below this morning’s eight-month high.

They got a bit excited with the Euro rate which of course had been just below 1.12 and not 1.20 but the principle of a Bank of England talking down the Pound has yet another tick in any measurement column. Somewhere Baron King of Lothbury would no doubt have been heard to chuckle. There is a particular irony in this with Deputy Governor Broadbent telling Radio 5 listeners this earlier.

BoE Broadbent: Faster Inflation Fuelled By Pound Weakness ( h/t @LiveSquawk )

Oh and I did say this was on permanent repeat.

BoE Broadbent: Expects UK Wage Growth To Pick Up In Coming Years ( h/t @LiveSquawk )

 

Oh and as someone pointed out in yesterdays comments there has been yet another Forward Guidance failure. If you look back to the first quote there is a mention of the TFS which regular readers will recognise as the Term Funding Scheme. Here are the relevant excerpts from the letter from Governor Carney to Chancellor Hammond.

I noted when the TFS was announced that total drawings would be determined by actual usage of the scheme, and could reach £100bn………. Consistent with this, I am requesting that you authorise an increase in the total size of the APF of £15bn to £560bn, in order to accommodate expected usage of the TFS by the end of the drawdown period.

Who could have possibly expected that the banks would want more of a subsidy?! Oh and the disinformation goes on as apparently they need more of it because of a “stronger economy”.

Also this seems to be something of a boys club again as my title suggests. We have had something of what Yes Minister might call a “woman overboard” problem at the Bank of England.

 

 

 

The Mark Carney experience at the Bank of England

This morning Mark Carney has given his Mansion House speech which was delayed due to the Grenfell Tower fire tragedy. One thing that was unlikely to be in the speech today was the outright cheerleading for the reform of the banking sector which was the basis of his speech back on the 7th of April as the news below emerged.

Barclays PLC and four former executives have been charged with conspiracy to commit fraud and the provision of unlawful financial assistance.

The Serious Fraud Office charges come at the end of a five-year investigation and relate to the bank’s fundraising at the height of 2008’s financial crisis.

Former chief executive John Varley is one of the four ex-staff who will face Westminster magistrates on 3 July.

Firstly let me welcome the news that there will be a trial although the conviction record of the Serious Fraud Office is not good. The problem is that this has taken around nine years about something ( £7 billion raised from Qatar ) which frankly looked to have dubious elements when it took place. What you might call  slooooooooooooow progress of justice.

What about UK interest-rates?

We first got a confession about something we discovered last week.

Different members of the MPC will understandably have different views about the outlook and therefore on the potential timing of any Bank Rate increase.

Actually that is an odd way of saying it as five members voted for no change with some more likely to vote for a cut that a rise in my opinion. Although of course Mark Carney has had trouble before with rises in interest-rates which turn out to be cuts!

Next we got a confirmation of the Governor’s opinion.

From my perspective, given the mixed signals on consumer spending and business investment, and given
the still subdued domestic inflationary pressures, in particular anaemic wage growth, now is not yet the time
to begin that adjustment

Indeed he seems keen to kick this rather awkward issue – because it would mean reversing last August’s Bank Rate cut – as far into the future as possible.

In the coming months, I would like to see the extent to which weaker consumption growth is offset by other components of demand, whether wages begin to firm, and more generally, how the economy reacts to the prospect of tighter financial conditions and the reality of Brexit negotiations.

Indeed if we are willing to ignore both UK economic history and the leads and lags in UK monetary policy then you might be able to believe this.

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.

Missing from the slap on the back that the Governor has given himself is the most powerful instrument of all which is the value of the UK Pound which has given the UK economy and more sadly inflation a boost. Indeed the initial response to the Governor’s jawboning was to add to the Pound’s fall as it fell below US $1.27 and 1.14 versus the Euro. Should it remain there then the total fall since the night of the EU leave vote then it is equivalent to a 2.75% fall in UK Bank Rate which is a bazooka compared to the 0.25% peashooter cut provided by the Bank of England. So if you believe Mark Carney you are likely not to be a fan of Alice In Wonderland.

“Why, sometimes I’ve believed as many as six impossible things before breakfast.”

Also if he is going to take credit for er “Credit is widely available” then he will be on very thin ice when he next claims the surge in unsecured credit is nothing to do with him.

Carney’s Cronies

Ironically in a way the foreign exchange market was a day late as you see the real change came yesterday.

​The Chancellor of the Exchequer has announced the appointment of Professor Silvana Tenreyro as an external member of the Monetary Policy Committee (MPC).  Silvana will be appointed for a three year term which will take effect from 7 July 2017.

There are several issues here, if I start with British female economists then that is another slap in the face for them as none have been judged suitable for a decade. Next came the thought that I had never previously heard of her which turned to concern as we were told she came from “academic excellence” in an era where Ivory Towers have consistently crumbled and fallen along the lines of Mount Doom in the Lord of the Rings. But after a little research one could see why she had been appointed. From a survey taken by the Centre For Macroeconomics.

Question Do you agree that the benefits of reforming the monetary system to allow materially negative policy interest rates outweigh the possible costs?

Agree. Confident. Reforming the monetary system to allow negative policy interest rates will equip the BoE with an additional tool to face potential crises in the future.

Does “reforming the monetary system” sound somewhat like someone who will support restrictions on the use of cash currency and maybe its banning? She is also a fan of QE ( Quantitative Easing ) style policies.

Question Do you agree that central banks should continue to use the unconventional tools of monetary policy deployed in response to the global financial crisis as part of monetary policy under normal economic conditions?

Agree. Confident. A wider set of policy tools would give mature and credible central banks like the BoE more flexibility to respond to changing economic conditions.

What is it about her apparent support for negative interest-rate and QE that attracted the attention of Mark Carney? Of course in a world after the woeful failure of Forward Guidance and indeed the litany of forecasting errors he was probably grateful to find someone who still calls the Bank of England “credible”!

Comment

We have a few things to consider and let me start with the reaction function of foreign exchange markets. The real news was yesterday as a fan of negative interest-rates was appointed to the Bank of England but the UK Pound waited until Mark Carney repeated his views of only Thursday to fall!

Meanwhile there was this from Governor Carney.

Monetary policy cannot prevent the weaker real income growth likely to accompany the transition to new
trading arrangements with the EU. But it can influence how this hit to incomes is distributed between job losses and price rises.

His views on the EU leave vote are hardly news although some are trying to present them as such. You might think after all the forecasting errors and Forward Guidance failures he would be quiet about such things. But my main issue here is the sort of Phillips Curve way we are presented a choice between “job losses” and “price rises” Just as all credibility of such thinking has collapsed even for those with a very slow response function in fact one slow enough to be at the Serious Fraud Office. He is also contradicting himself as it was only a few months ago we were being told by him that wage growth was on the up. Although that February Inflation Forecast press conference did see signs that the normally supine press corps were becoming unsettled about a Governor previously described as a “rockstar central banker” and “George Clooney” look a like.

Governor, back in August the forecast for GDP for this year
was 0.8%. Now it’s being forecast at 2.0%. That’s a really
hefty adjustment. What went wrong with your initial
forecast?

He may not be that bothered as you see much of today’s speech was in my opinion part of his job application to replace Christine Lagarde at the IMF.

With many concerned that global trade is taking local jobs, protectionist sentiments are once again rising
across the advanced world. Excessive trade and current account imbalances are now politically as well as
economically unsustainable.

Number Crunching

Problems mount for Mark Carney at Mansion House

The UK’s central bank announces its policy decision today and it faces challenges on several fronts. The first was highlighted yesterday evening by the US Federal Reserve.

In view of realized and expected labor market conditions and inflation, the Committee decided to raise the target range for the federal funds rate to 1 to 1-1/4 percent. The stance of monetary policy remains accommodative, thereby supporting some further strengthening in labor market conditions and a sustained return to 2 percent inflation.

UK monetary policy is normally similar to that in the US as our economies often follow the same cycles. This time around however the Bank of England has cut to 0.25% whilst the Federal Reserve has been raising interest-rates creating a gap of 0.75% to 1% now. In terms of the past maybe not a large gap but of course these days the gap is large in a world of zero and indeed negative interest-rates. Also we can expect the gap to grow in the future.

The Committee expects that economic conditions will evolve in a manner that will warrant gradual increases in the federal funds rate;

There was also more as the Federal Reserve made another change which headed in the opposite direction to Bank of England policy.

The Committee currently expects to begin implementing a balance sheet normalization program this year, provided that the economy evolves broadly as anticipated.

So the Federal Reserve is planning to start the long journey to what used to be regarded as normal for a central bank balance sheet. Of course only last August the Bank of England set out on expanding its balance sheet by another £70 billion if we include the Corporate Bond purchases in what its Chief Economist Andy Haldane called a “Sledgehammer”. So again the two central banks have been heading in opposite directions. Also on that subject Mr.Haldane was reappointed for another three years this week. Does anybody know on what grounds? After all the wages data from yesterday suggested yet another fail on the forecasting front in an ever-growing series.

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.

For those interested in what Andy would presumably call an anti-Sledgehammer here it is.

( For Treasury Bonds) the Committee anticipates that the cap will be $6 billion per month initially and will increase in steps of $6 billion at three-month intervals over 12 months until it reaches $30 billion per month…… ( for Mortgage Securities) the Committee anticipates that the cap will be $4 billion per month initially and will increase in steps of $4 billion at three-month intervals over 12 months until it reaches $20 billion per month.

Whilst these really are baby steps compared to a balance sheet of US $4.46 trillion they do at least represent a welcome move in the right direction.

The Inflation Conundrum

This has several facets for the Bank of England. The most obvious is that it eased policy last August as inflation was expected to rise and this month we see that the inflation measure it is supposed to keep around 2% per annum ( CPI ) has risen to 2.9% with more rises expected. It of course badged the “Sledgehammer” move as being expansionary for the economy but I have argued all along that it is more complex than that and may even be contractionary.

Today’s Retail Sales numbers give an example of my thinking so let me use them to explain. Here they are.

In May 2017, the quantity bought in the retail industry was estimated to have increased by 0.9% compared with May 2016; the annual growth rate was last lower in April 2013…..Month-on-month, the quantity bought was estimated to have fallen by 1.2% following strong growth in April 2017.

So after a strong 2016 UK retail sales have weakened in 2017 but my argument is that the main driver here has been this.

Average store prices (excluding fuel) increased by 2.8% on the year; the largest growth since March 2012.

It has been the rise in prices or higher inflation which has been the main driver of the weakness in retail sales. A factor in this has been the lower value of the Pound which if you use the US inflation numbers as a control has so far raised UK inflation by around 1%. This weakness in the currency was added to by expectations of Bank of England monetary easing which of course were fulfilled. You may note I say expectations because as some of us have been discussing in the comments section the main impact of QE on a currency happens in the expectations/anticipation phase.

On the other side of the coin you have to believe that a 0.25% cut in interest-rates has a material impact after cuts of over 4% did not! Also that increasing the Bank of England’s balance sheet will do more than adding to house prices and easing the fiscal deficit. A ten-year Gilt yield of 0.96% does not go well with inflation at 2.9% ( CPI) and of course even worse with RPI ( 3.7%).

House Prices

I spotted this earlier in the Financial Times which poses a serious question to Bank of England policy.

Since 1980, the compounded inflation-adjusted gain for a UK homeowner has been 212 per cent. Before 1980 house price gains were much tamer over the various cycles either side of the second world war. Indeed, in aggregate, prices were largely unchanged over the previous 100 years, once inflation is accounted for.

A change in policy? Of course much of that was before Mark Carney’s time but we know from his time in Canada and here that house price surges and bubbles do happen on his watch. The article then looks at debt availability.

The one factor that did change, though, and marked the start of that step change in 1980, is the supply of mortgage debt……….has resulted in a sevenfold increase in inflation-adjusted mortgage debt levels since then.

This leads to something that I would like Mark Carney to address in his Mansion House speech tonight.

Second an inflation-targeting central bank, which has delivered a more aggressive monetary response to each of the recent downturns, because of that high debt burden.

On that road we in the UK will see negative interest-rates in the next downturn which of course may be on the horizon.

Comment

There is much to consider for the Governor of the Bank of England tonight. If he continues on the current path of cutting interest-rates and adding to QE on any prospect of an economic slow down then neither he nor his 8 fellow policy setting colleagues are required. We could replace them with an AI ( Artificially Intelligent ) Robot although I guess the danger is that it becomes sentient Skynet style ( from The Terminator films ) and starts to question what it is doing?

However moving on from knee-jerk junkie culture monetary policy has plenty of problems. It first requires both acknowledgement and admittal that monetary policy can do some things but cannot do others. Also that international influences are often at play which includes foreign monetary policy. I have looked at the Federal Reserve today well via the Far East other monetary policy applies. Let me hand you over to some research from Neal Hudson of Residential Analysts on buyers of property in London from the Far East.

However, anecdotal evidence suggests that many of these buyers have been using local mortgages to fund their purchases.  The limited evidence I have suggests that around half of Hong Kong and Singaporean buyers use a local mortgage while the majority of mainland Chinese buyers use one.

Okay on what terms?

The main difference is that the mortgage rate tends to be slightly higher (London Home Loan comparison) and local lenders allow borrowers to have far higher debt multiples.

These people are not as rich as might previously have been assumed and we need to throw in changes in the value of the UK Pound £ which are good for new buyers but bad for existing ones. Complicated now isn’t it?

On a personal level I was intrigued by this.

Last year I visited a development in Nine Elms and the lobby felt more like a hotel than a residential block. There were significant numbers of people appearing to pick up and drop off keys with suitcases in tow.

You see I live in another part of Battersea ( the other side of the park) and where i live feels like that as well.

 

 

 

Gloomy Gertjan of the Bank of England could easily vote for another Bank Rate cut

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?

Forecasting problems

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.

and

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.

Future policy

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.

Comment

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,

Chocolate bars

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

http://tiptv.co.uk/look-nova-banco-mess-czech-currency-peg-not-yes-man-economics/

 

 

 

 

The Bank of England may consider yet more easing going forwards

Today the Bank of England announces its policy decision although care is needed because it actually voted yesterday. This was one of the “improvements” announced a while ago by Governor Mark Carney and it is something I have criticised. My views have only been strengthened by this development. From the Financial Times today.

Andrew Tyrie wrote to the Financial Conduct Authority on Wednesday to ask the regulator to scrutinise unusual patterns of trading behaviour ahead of market-moving data releases. “It would be appalling, were people found to be exploiting privileged pre-release access to ONS data for financial benefit,” said Andrew Tyrie, the chairman of the select committee, referring to the Office for National Statistics. “The FCA is responsible for market integrity. So I have written to them today to ask them to get to the bottom of this.”

Whilst this is not directly related to the Bank of England the UK ship of state looks increasingly to be a leaky vessel. As ever Yes Prime Minister was on the case 30 years ago.

James Hacker: I occasionally have confidential press briefings, but I have never leaked.
Bernard Woolley: Oh, that’s another of those irregular verbs, isn’t it? I give confidential press briefings; you leak; he’s been charged under Section 2a of the Official Secrets Act.

These are important matters where things should be above reproach. Speaking of that it is another clear error of judgement by Governor Carney to allow Charlotte Hogg to vote on UK monetary policy this week. The official releases about her resignation have skirted over the fact that she demonstrated a disturbing lack of knowledge about monetary policy when quizzed by the Treasury Select Committee leading to the thought that her actual qualification was to say ” I agree with Mark”.

Other central banks

The Swiss National Bank has joined the groupthink parade ( if you recall something Charlotte Hogg denied existed) this morning. Whilst busy threatening even more foreign exchange intervention and keeping its main interest-rate at 0.75% it confessed to this.

economic growth in the UK was once again surprisingly strong.

US Federal Reserve and GDP

There was something to shake the Ivory Towers to their foundations in the comments of US Federal Reserve Chair Janet Yellen yesterday evening. From the Wall Street Journal.

The Atlanta Fed’s GDPNow model today lowered its forecast for first-quarter GDP growth to a 0.9% pace. But Ms. Yellen shrugged off signs of weakness in the gauge of overall U.S. economic activity.

 

“GDP is a pretty noisy indicator,” she said, and officials haven’t changed their view of the outlook. The Fed expects continued improvement in the labor market and broader economy, though she also cautioned that policy isn’t set in stone.

Central banks have adjusted policy time and time again in response to GDP data and for quite some time Bank of England moves looked like they were predicated on it. Now it is apparently “noisy” which provides quite a critique of past policy. Also what must she think of durable goods and retail sales numbers?! Also this is like putting the one ring in the fires of Mordor to the Ivory Towers who support nominal GDP targeting. Oh and as we have observed more than a few times in the past the first quarter number for US GDP has been consistently weak for a while now leading to the issue of “seasonal adjustment squared”.

Things to make Mark Carney smile

Central bankers love high asset prices so let us take a look. From the BBC.

The UK’s FTSE 100 share index has broken through 7,400 points to hit a record intra-day high. The blue chip index is currently trading at 7,421 points.

The official data on house prices is a little behind but will raise a particular smile as of course it helps the mortgage books of the banks.

Average house prices in the UK have increased by 7.2% in the year to December 2016 (up from 6.1% in the year to November 2016), continuing the strong growth seen since the end of 2013.

Maybe even a buyer or two in central London.

Just faced a sealed bid stuation for a client buying a house in Knightsbridge. Life in the London property market is back. ( @joeccles )

Also with the ten-year Gilt yield at 1.22% then UK bonds are at an extremely high level in price terms albeit not as high as when Mark surged into the market last summer.

Maybe even the Bank of England’s investments in the corporate bonds of the Danish shipping company Maersk can be claimed to be having a beneficial effect.

Maersk Oil has managed to cut operating expenditure by about 40% in the last two years, and analysts at Wood Mackenzie predict the company will be the third biggest investor in the UK continental shelf (UKCS) by 2020. (h/t @chigrl )

Although Maersk put it down to a change in taxation policy and there is little benefit now for the UK from this bit.

He was speaking to Energy Voice at the yard in Singapore where the floating storage and offloading (FSO) unit for the £3.3billion North Sea Culzean project is being built.

In terms of good economic news there was this announcement today. From the BBC.

Toyota is to invest £240m in upgrading its UK factory that makes the Auris and Avensis models.

The Japanese carmaker’s investment in the Burnaston plant near Derby will allow production of vehicles using its new global manufacturing system.

Things to make the Bank of England frown

Ordinarily one might expect to be discussing the way that UK inflation will go above target this year and maybe even next week. But we know that the majority of the Monetary Policy Committee plan to “look through” this and thus will only pay lip service to it. However yesterday’s news will give them pause.

If we look into the single month detail it is worrying as you see December was 1.9% and January 1.7% giving a clear downwards trend. If we look further we see that those months saw much lower bonus payments than a year before and in fact falls as for example -3.9% and -2.7% was reported respectively. Putting it another way UK average earnings reached £509 in November but were £507 in both December and January.

They will now be worried about wages growth and should this continue much of the MPC will concentrate on this.

Comment

Today seems to be set to be an “I agree with Mark” fest unless Kristin Forbes feels like a bit of rebellion before she departs the Bank of England in the summer. However should there be any other signs of weakness in the UK economy then we will see some of the MPC shift towards more easing I think in spite of the inflation trajectory. That means that it will be out of sync with the US Federal Reserve and the People’s Bank of China ( which raised some interest-rates by either 0.1% or 0.2% this morning).

It may cheer this as an example of strength for the UK property market and indeed banks. From the Financial Times.

BNP Paribas is in talks to acquire Strutt & Parker, the UK estate agents, in what would be a Brexit-defying vote of confidence in the British property market by France’s biggest bank.

Can anybody recall what happened last time banks piled into UK estate-agents?

Correction

On Monday I suggested that we would see more Operation Twist style QE from the Bank of England today. Apologies but I misread the list and that will not be so. Off to the opticians for me.

The 0.0001% take the reins at the Bank of England

Yesterday was a rather extraordinary day in the life of the Bank of England which had a Back to the Future feel about it. The Bank of England has not had a person with a peerage at the helm since the period 1944-66 yet there was the equivalent of what is called in cricket ” a future England captain” in front of the Treasury Select Committee who is the daughter and hence I believe second in line to be whatever the daughter of both a Viscount and a Baroness becomes. This was of course Charlotte Hogg who was described by the Guardian thus.

Friends say the 42-year-old was destined for greatness from birth, but say she inherited a “stunning intellect” along with her establishment surname.

I am not sure I would want friends like that and the City slang for being well off or “minted” needs to be replaced with moated in this respect.

Charlotte Hogg grew up in a grade-II-listed moated country house where evenings were spent debating Thatcherite privatisations, economic policy and even European agriculture with whichever leading member of the cabinet had popped round for supper.

Twitter has its own way of covering such things.

Charlotte Hogg’s Family Tree needs to have a whole chapter to itself in Debrett’s… ( h/t @CoxeyLoxey )

If we move to what took place then one of my rules of thumb was in play. This goes as follows. If an establishment figure is reported as intelligent then the number of times that happens the more I subtract from their expected intelligence. In the way that Oliver Letwin went from a man with a “great brain” to one stuffing important papers in rubbish bins. I note therefore how often Charlotte is described as intelligent in the Guardian article.

QE

This section started badly when Charlotte was accused of misrepresenting changes in inequality as wealth inequality has risen since 2007. She was referred to the 2012 Bank of England paper on this and seemed vague about it. It got worse when Charlotte was quizzed on issues of how QE might ever be reversed which is supposed to be part of her remit as Deputy Governor for markets, her answer of “I do think that is quite a long way off in the future” got the reply that such an answer was not good enough.

There was a bit which was even worse and here it is.

Andrew Tyrie ” On balance do you think we would be better off unwinding it or letting it run off?”

Charlotte Hogg ” I don’t see the distinction between the two to be honest”

So apparently there is no difference between unwinding our holdings in  Gilts and letting them mature. So in the extreme case of the longest held by the Bank of England which matures in 2068 pretty much anybody can see the difference in unwinding it today and letting it run to 2068. Andrew Tyrie then suggested that the advice of the Debt Management Office or DMO might be sought presumably hoping that they would have a better grasp of the subject.

This was of course a tacit admittal that the Bank of England has no intention at all of unwinding any of it QE bond holdings which sat rather oddly with this statement from Miss Hogg.

Bank of England’s Hogg says is not alive and well at the . I think all MPC members agree on that. ( Andy Bruce of Reuters )

Also she does not appear to think that this from her written statement has anything to do with the prices and yields in the UK Gilt market.

Having been £85bn at the end of 2006, the total assets on the Bank’s balance sheet are now worth £519bn. The largest item is a £481bn loan to the Asset Purchase Facility – the vehicle through which gilt purchases, corporate bond purchases and TFS lending have been executed on behalf of the MPC.

If Charlotte actually believes what she says then I look forwards to her voting against any more QE which must be pointless as apparently Gilt prices and yields would be unaffected if it stopped.

Today’s data

This morning’s money supply data was another in a series which poses questions for Bank of England policy. The broad measure of the money supply rose by 7% and the lending measure by 5.6% so if we say the economy is growing at around 2% that leaves 5% unaccounted for which is likely to turn up in the inflation numbers sooner or later if UK economic history is any guide.

Also credit seems to be flowing if we look at the mortgage sector.

Lending secured on dwellings rose by £3.4 billion in January. Gross lending and repayments both increased and were above their recent averages .  Approvals of loans secured on dwellings for house purchase increased for the fourth consecutive month and, at 69,928, were the highest since February 2016.

It seems that the boom in unsecured credit is continuing.

The net flow of consumer credit was £1.4 billion in January . The twelve-month growth rate ticked down to 10.3%.

We are regularly told that the monetary policy easing and bank subsidy efforts like the Term funding Scheme are to get credit flowing to smaller businesses, so how is that going?

Loans to small and medium-sized enterprises (SMEs) decreased by £0.2 billion.

Now there seems to be quite a contrast in the response of household borrowing especially of the unsecured kind and business lending does their not? The former has pushed higher since these policies began in the summer of 2013 and some of it has surged whereas the latter has mostly fallen. Or to put it another way only the latter will see the use of the word counterfactual.

The Bank of England has of course been claiming that it saved the UK economy with its August moves so we should be seeing a benefit in small business lending except the growth rate in the last 4 months has gone, -0.2%,0.1, -0.3%,-0.2%.

Comment

So far the UK economy has done pretty well after the EU leave vote which of course is awkward in itself for a Bank of England which predicted an immediate downturn. Of course it was even worse for the Forward Guidance of Governor Carney who predicted an interest-rate rise in such circumstances as recently as January 2016 and then cut them. However so far so good as the Manufacturing PMI business survey told us today.

The survey is signalling quarterly manufacturing output growth close to the 1.5% mark so far in the opening quarter which, if achieved, would be one of the best performances over the past seven years.

The rub in Shakesperian terms will come later in 2017 from this.

“On the price front, input costs and output charges are still rising at near survey record rates. However, the recent easing in both suggests that the impact of the weak sterling exchange rate on prices is starting to subside, providing welcome respite with regards to pipeline inflationary pressures.

But of course by easing the Bank of England made this worse and not better. The reason it did so is that it has a Governor who even those who support him are thinking he appoints people who are “Friends of Mark” which of course I have labelled for some time as “Carney’s Cronies”. The saddest part is that the welcome introduction of more women to the Bank of England has been affected by this as there are plenty of intelligent capable women around. The point of having nine members of the Monetary Policy Committee is to benefit from different views not have them ruled like the nine Nazgul in The Lord of the Rings.

 

 

 

Why is Mark Carney avoiding the “credit” for higher house prices?

We find ourselves in the middle of a concerted campaign by the Bank of England which is in a phase where it is barely out of the news and media. It was only yesterday we looked at the published views of its Chief Economist and now we find that Governor Carney has had plenty to say. There is one clear feature of these Open Mouth Operations from the Bank of England and that is that the headlines are about anything but monetary policy! Both seem very keen to discuss matters that are beyond their remit which to my mind is a confession that my critique that they made a policy error in August is troubling them.

Let me open with something about which the Governor and I can agree.

We meet today during the first lost decade since the 1860s

This first makes me think of his past claim that monetary policy was not “Maxxed-Out”, if so what has he been doing on his own terms? But let me continue with something else I can agree with because it is at the heart of my analysis.

Over the past decade real earnings have grown at the slowest rate since the mid-19th Century

Now that is a type of lost decade. But we immediately have a problem because our Mark is trying to deflect us away from a policy choice he has made which in my opinion will make the situation worse.

The MPC is choosing a period of somewhat higher consumer price inflation in exchange for a more modest increase in unemployment

Having highlighted real wages he then attempts to ignore this.

this resolution is expected to occur as imported inflation begins to weigh on people’s real incomes, slowing consumption growth.

He even gives us the economic equivalent of a straw (wo)man to deflect us from the situation above.

For example, returning inflation to the 2% target in three years’ time would call for rates around 100 basis points higher over the next three years. Compared to the MPC’s November projections, that would increase unemployment by around 250,000 people.

No doubt the economics department at the Bank of England will produce any simulation the Governor wants but some of this is risible. For example this is very different to him simply not having cut interest-rates in August. Also his policy horizon is not 3 years unless he is now choosing his own one. If we move onto CPI inflation heading towards 3%+ and RPI inflation heading towards 4%+ how does that go with this rhetoric Mark?

The happy medium is a monetary policy framework with a credible commitment to low, stable, predictable inflation over the medium term, as in the UK’s tried and tested arrangements.

Incredible more like……

Distribution problems

We are hearing a lot about this from the Bank of England which is a clear sign that reality is proving inconvenient for it. There is quite a shift implied in the sentence below and my theme that Bank of England Governors morph into the same person gets support from the re-emergence of the word “rebalancing” as the spectre of Baron King of Lothbury appears like the Ghost of Christmas Past.

we must grow our economy by rebalancing the mix of monetary policy, fiscal policy and structural reforms.

Is he now responsible for these too or sing along to the “It wasn’t me” from Shaggy? Let us take the advice he gives below.

Acknowledge current challenges and address them, wherever possible.

Quantitative Easing

This is a big problem for Mark Carney on a day he had just bought another £1 billion of UK Gilts. The problem is that it has helped the rich or if you prefer those who own assets. As central banks have majored on “wealth effects” as a gain from easy monetary policy they have provided their own confession to this challenge. Mark gives us examples of the effect in America and the world but is a lot more shy about the UK.

The picture in the UK is complex but in general suggests relatively stable but high levels of overall inequality, with sharper disparities emerging in recent times for the top 1%.

I am not so sure why he is being so shy as you see back in 2012 the Bank of England’s own research hammered the point home.

By pushing up a range of asset prices, asset purchases have boosted the value of households’ financial wealth held outside pension funds, but holdings are heavily skewed with the top 5% of households holding 40% of these assets.

Perhaps for Mark UK economic history only starts in June 2013. But if so he then has a problem because he seems a little shy about this as well!

Moreover, rising real house prices between the mid-1990s and the late 2000s has created a growing disparity between older home owners and younger renters

But house prices have been doing this on Mark’s watch.

Average house prices in the UK have increased by 7.7% in the year to September 2016 (unchanged from 7.7% in the year to August 2016), continuing the strong growth seen since the end of 2013. ( Office for National Statistics).

Surely he wants to take the credit for the wealth effects central bankers love? Or perhaps just not yesterday. Meanwhile ( and thank you to Andrew Baldwin for reminding us of regional inflation differences in yesterday’s comments) we see this in the official data.

In September 2016, the most expensive borough to live in was Kensington and Chelsea, where the cost of an average house was £1.4 million. In contrast, the cheapest area to purchase a property was Blaenau Gwent, where an average house cost £76,000.

I don’t know about you but the implications of that are an extraordinary distribution of wealth and resources?! Not every bit is his fault as capital cities especially London have been en vogue. But when we read of cheapest ever mortgage rates and the Funding for (Mortgage) Lending Scheme and now the MTFS a big arrow points at Governor Carney’s office. The banks always seem to pass go and collect £200 whilst the Go to jail, go directly to jail card seems to have disappeared from the version of Monopoly.

Does monetary policy float all boats?

There are obvious critiques of this above but let me add what is another major theme of mine and let me use Governor Carney’s own words to do it.

Few in positions of responsibility took theirs. Shareholders, taxpayers and citizens paid the heavy price.

QE and easy monetary policy bailed them out and ossified the financial system and thereby contributed heavily to this.

In the UK the shortfall, at 16%, is even worse ( GDP per capita)…The underlying reasons for the 16% shortfall of the UK’s productive capacity, relative to trend, are poorly understood.

I do not like projecting trends but in spite of the fact that doing so has been a disaster the Bank of England loves it, well for things that suit it anyway.

Comment

There are a litany of issues here. For example I am no doctor but I cannot think of any cure that takes eight years not to work can you?

Monetary policy has been keeping the patient alive, creating the possibility of a lasting cure through fiscal and structural operations. It has averted depression and helped advanced economies live to fight another day, so that measures to restore vitality can be taken.

8 years Mark? Anyway in these 8 years Mark has been busy marking his own exam paper.

What if the MPC had not acted? Simulations using the Bank’s main forecasting model suggest that the Bank’s monetary policy measures raised the level of GDP by around 8% relative to trend and lowered unemployment by 4 percentage points at their peak. Without this action, real wages would have been 8% lower, or around £2,000 per worker per year, and 1.5 million more people would have been out of work. In short, monetary policy has been highly effective.

So in Spinal Tap terms Mark has awarded himself 11 out of 10. Or more likely some economist deep in the bowels of the Bank of England bunker has. On his road to being a supreme court of judge,jury and witness on himself he does not seem to have suffered from this “uncertainty is high”.

So there you have it a masterclass in a Sir Humphrey Appleby style speech where you attract favourable headlines and leave behind misleading messages. Oh and speaking of Yes Prime Minister I doff my cap one more time!

Leak inquiry into leaking of letter warning about leaks

Just as a reminder the purpose of a leak inquiry is merely not exist not to actually catch anyone. Otherwise it might catch the person who launched the inquiry….