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.


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.


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





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.


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?


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.


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%.


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.


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….

Andy Haldane of the Bank of England is lost in his own land of confusion

Today I wish to examine the policies of Bank of England Chief Economist Andy Haldane who gave a speech on Friday. There was much to consider in it and to set the scene I would like to take you back to the 30th of June when Andy felt that the EU leave vote was along the lines of the end of the (economic) world as he knew it.

Second, even though the economy is unlikely to crash, it is likely to slow, perhaps materially, in the quarters ahead. ……. External economists expect the UK economy to tread water over the next few quarters…….But there is a strong sense of trim and singe.

So far of course he has been proven wrong and it turns out that a lot of this was in Andy’s mind.

This has generated considerable uncertainty about the economy, about policy and about politics – a heady cocktail.

Perhaps the most spectacular error was the implied view for household consumption and retail sales from this.

Meanwhile, among households there are signs of a significant slowing in both confidence and in the housing market, which are often inter-twined……..And where housing leads, the economy often tends to follow.

Whereas in the real world or “reality” which Andy wants other people to get in this is the official data we have.

In October 2016, the quantity of goods bought (volume) in the retail industry was estimated to have increased by 7.4% compared with October 2015; all store types showed growth with the largest contribution coming from non-store retailing. This is the highest rate of growth since April 2002.

Compared with September 2016, the quantity bought was estimated to have increased by 1.9%;

I suppose if Andy is a rugby fan he would have concluded from the first part of the England versus Australia Test Match that Australia were going to win 50-0 and may even have wondered about the future of coach Eddie Jones. Instead of course for those who do not follow rugby England’s unbeaten run continued making fans like me very happy.

What did Dr.Andy prescribe for the economy?

He wanted this.

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 – like another Andy, the one in the Shawshank Redemption. And yes I know Andy did eventually escape. But it did take him 20 years. The MPC does not have that same “luxury”.

Which meant what exactly?

In my personal view, this means a material easing of monetary policy is likely to be needed, as one part of a collective policy response aimed at helping protect the economy and jobs from a downturn

In case you missed the hint that he was suggesting a series of moves there was more.

Given the scale of insurance required………And this monetary response, if it is to buttress expectations and confidence, needs I think to be delivered promptly as well as muscularly.

The August Bank of England Minutes reinforced this view along the lines of “Stand By For Action!” from the opening scenes of the television series Stingray.

If the incoming data prove broadly consistent with the August Inflation Report forecast, a majority of members expect to support a further cut in Bank Rate to its effective lower bound at one of the MPC’s forthcoming meetings during the course of the year. The MPC currently judges this bound to be close to, but a little above, zero.

I put the last sentence in because the early bits were later proven to be wrong whereas it was already known to be wrong! How can you say the “lower bound” for interest-rates is just above zero when the Euro area has -0.4%, Sweden has -0.5% and Switzerland -0.75%?

Of Inequality and Andy’s misrepresentation

This is a big area as Andy badges himself and is presented by the media as someone concerned about inequality. Yet part of his “sledgehammer” was an extra £60 billion of UK Gilt (government bond) purchases which the Bank of England has previously admitted made the rich richer. Actually back in June such a confession was tucked away in his speech.

the headline gains here have been impressive, with aggregate net wealth increasing by almost £3 trillion since 2009……..This suggests these gains have come principally from rises in property and pension wealth

Ah pension wealth! Yes that has soared for Bank of England policymakers but I suspect he is not referring to that as we recall he claims not to understand pensions. Anyway here is a clear consequence of the monetary easing Andy was so keen on more of.

In other words, the gains have been skewed towards those in society who own their own home or who have sizable pension pots.

Back in June he put it another way.

We’ve intentionally blown the biggest government bond bubble in history

Not the biggest Andy you blew a much larger one when you pushed the ten-year Gilt yield down to nearly 0.5%. Should anyone have hedged down there or up there is price terms – I am thinking pension funds and insurance companies here – then the blame should go straight to Andy’s door.

What does our Andy think now?

Presumably he is still on his “more,more,more” bandwagon? Well not quite.

My personal view is that this provides grounds for not proceeding too hastily with any tightening of the monetary policy stance.

There is a screeching hand brake U-Turn implied here as we move from promises of more interest-rate cuts and QE to a possible rise. Perhaps that is why the title of the speech was “red car, blue  car!. Also Andy has of course been part of a Bank of England which promised interest-rate rises via the ill-fated Forward Guidance and then cut before! Speaking of cars how is that sector doing?

UK new car market rises 2.9% in November, with 184,101 vehicles registered on British roads……The growth has helped deliver more than 2.5 million new cars on to British roads so far this year – the first time the milestone has been reached in November.

So not much sign of the collapse in confidence that Andy was so confidently expecting. Another dose of reality for the man who prescribes it for others. Perhaps the discussion of an interest-rate rise is to distract the media from the ch-ch-changes here.

In the MPC’s judgement in November, managing this trade-off was best achieved by maintaining the current monetary policy stance, with a neutral bias on the direction of the next move in interest rates……..My own personal judgement on the appropriate monetary policy stance is close to the MPC consensus


In many ways the issue here has a background to be expected from a person who has been at the same institution for 27 years. A type of going stir crazy is only to be expected. The most extreme version of this is thinking that life in a bunker in Threadneedle Street in the heart of the City of London allows you to lecture others on reality.After all reality for many involves worries about pensions whereas back in September The Guardian reflected on the insulation and in fact isolation from such worries for Andy and his colleagues.

In a detailed analysis of the Bank’s pension scheme circulated to the media on Monday, Altmann said its employer contributions exceeded 50%.

If we move to the UK economy then the latest business survey from Markit has told us this today.

The three PMI surveys collectively indicate that the economy will grow by 0.5% in the fourth quarter

Of course the economy may dip in 2017 but if it does so it will be driven by something that Andy is cavalier about in my opinion.

The projections for inflation were the highest ever published by the Bank

These were made worse by Andy’s “Sledgehammer” pushing the value of the Pound lower.

expectations of inflation have picked up, largely as a result of sterling’s depreciation.

So we have a probable scene of real wages falling due to high inflation that supposed easing has made worse. On that road monetary easing has the problems of but not the gains from a tightening of policy and reality for Andy will be for a policy error. for those hurt by it the consequences will be much worse in terms of living-standards and (un)employment.

Ooh Superman where are you now
When everything’s gone wrong somehow
The men of steel, the men of power
Are losing control by the hour. (Genesis)



How many promises about Royal Bank of Scotland have been broken today?

One of the main features of the credit crunch in the UK were the collapse of Royal Bank of Scotland and the UK taxpayer bailout of it. Since then we have been regularly informed that it has recovered and that the sunlit uplands are not only in sight but have arrived. The 27th of January this year was an example of this.

“I am determined to put the issues of the past behind us and make sure RBS is a stronger, safer bank,” chief executive Ross McEwan said.

“We will now continue to move further and faster in 2016 to clean up the bank and improve our core businesses.”

I am not sure how you can move “further and faster” on something you have supposedly fixed several times before! If we look back to September 2014 we were told something which is likely to echo later in this article.

we expect to spend much of the next 18 months simply marvelling at the sheet size of the RBS’ capital surplus and wondering why it is just sitting there gathering dust,’ he said.

Back in 2012 my old employer Union Bank of Scotland was on the case sort of.

However, with 2013 expected to be the last year of significant restructuring for RBS, it is likely to be one of the first European banks to have dealt with legacy issues

The International Financing Review put its oar in as well.

In some ways, however, RBS is well ahead of the pack…….RBS was forced to concentrate on what it was good at and should come out of its current (second) restructuring as one of the more efficient banks in the industry.

Mind you at least someone had a sense of humour on the way.

If we advance to the figures released in January of 2014 we see that BlueBullet on Twitter had a wry take on events.

Dear Dragons Den, I have 80% share. Losses this year are £8 billion. I am paying out £0.5 billion in bonuses. Would you like to invest? #RBS

Royal Bank of Scotland Today

Which pack was RBS “well ahead of” here?

The Royal Bank of Scotland Group (RBS) did not meet its common equity Tier 1 (CET1) capital or Tier 1 leverage hurdle rates before additional Tier 1 (AT1) conversion in this scenario. After AT1 conversion, it did not meet its CET1 systemic reference point or Tier 1 leverage ratio hurdle rate.

The rhetoric carries on as Mark Carney is telling us “they (RBS) have made progress” in this morning’s press conference. Although there is a clear warning signal as he deflects a question about it to a colleague. This happens on difficult questions and means that the Governor cannot be quoted in future on the details for RBS.

Reuters sums up the tale of woe for RBS here.

The unexpected result underlines the litany of problems RBS is grappling with, which include a mounting legal bill for misconduct ahead of the 2008 financial crisis and difficulties selling off assets such as its Williams & Glyn banking business.

So “litany of problems” is the new “stronger,safer bank”? So what will it do about this?

The state-backed lender rushed out a statement following the announcement to say it would take a range of actions, including selling off bad loans and cutting costs to make up the capital shortfall identified by the tests of around 2 billion pounds ($2.49 billion).

“Rushed out a statement” is really rather poor when it will have been given advance notice about this but this does echo its response to the 2008 crisis. Meanwhile I guess it cannot go back to the UK taxpayer for more cash as of course it did this only in March.

Royal Bank of Scotland is paying £1.2bn to the Treasury to buy out a crucial part of its £45bn bailout in a step towards returning the bank to the private sector.

This was a way that Chancellor George Osborne massaged and manipulated the UK public finances back then. Was this from Earth Wind & Fire the backing track?

Every man has a place
In his heart there’s a space
And the world can’t erase his fantasies
Take a ride in the sky
On our ship, fantasize
All your dreams will come true right away

I do hope that he will be called in front of the Treasury Select Committee to explain this and that his diary is not too full as he collects new titles. As I suspect we can file this in the bin.

George Osborne has already said he is hoping to generate £25bn from the sale of three-quarters of its RBS shares in this parliament,

The share price is down nearly 3% at 191.5 pence as I type this and perhaps it should be another 3%. The breakeven for the UK taxpayer is just over £5.

Other UK banks

There were more technical and minor failures to be seen.

Barclays did not meet its CET1 systemic reference point before AT1 conversion in this scenario. In light of the steps that Barclays had already announced to strengthen its capital position, the PRA Board did not require Barclays to submit a revised capital plan…..Standard Chartered…. did not meet its Tier 1 minimum capital requirement (including Pillar 2A). In light of the steps that Standard Chartered is already taking to strengthen its capital position, including the AT1 it has issued during 2016, the PRA Board did not require Standard Chartered to submit a revised capital plan.

A confession from Mark Carney

We got yet another U-Turn as we were told that household debt is now an issue which I summarised on Twitter like this.

Mark Carney says “thanks” to a question about household debt which means of course the opposite!

The fact that the subject got a mention is extremely revealing. As nobody at the press conference had either the gumption or the courage to ask Governor Carney how his Bank Rate cut and extra QE would improve household debt we were left with a sinking feeling. Which of course is what Governor Carney had been telling us was happening to house hold debt. Also he has a pretty odd view about lending for cars and automobiles.

Does Mark Carney really think “auto lending” is secured debt as he just claimed? What about depreciation?

There used to be quite a few adverts on the radio for Buy To Let lending for cars which I always thought was bizarre. Either Governor Carney wants to boost this or he used his £250,000 a year rent allowance to have a punt. Oh excuse me, long-term investment.

We were also told that he has plenty of “tools” although when I enquired about a definition of them some were ones he may or may not agree with.

A bunch of them, they sit on the committee with me.

I have been warning about the rise of unsecured lending in the UK and my latest piece on the issue was only yesterday. Perhaps the Governor read it.


There are several issues to consider here. I think that the way Governor Carney has used it to highlight claimed concerns about the rise of household lending is revealing. It enabled him to get this on record with little chance of being challenged as the media rushes to print about RBS. I also note that he shuffled the question about Buy To Let lending to someone else.

Meanwhile RBS continues on its own private ( albeit publicly owned) Road To Nowhere. We have almost infinite inflation in false dawns but a reality of disappointment and failure. After 8 years of this is it time to file the claims of reform in the “Liars Lexicon” mentioned in the comments section yesterday.

Meanwhile we have an example of another of my themes in play. Actual helicopter money from the Indian Air Force.


Mark Carney needs to explain why he eased policy in a currency decline

Today is another not quite Super Thursday where the Bank of England takes centre stage and publishes the quarterly Inflation Report as well as its policy announcement and meeting minutes. However the Super Thursday moniker has been grabbed early by the Central Bank of Egypt which has become the doppelganger of the “masterly inaction” so beloved of the apochryphal civil servant Sir Humphrey Appleby. It’s website is struggling so let us use Bloomberg.

Policy makers set a tentative exchange rate of 13 pounds per dollar, plus or minus 10 percent, until it holds an auction at 1 p.m. local time. The currency will float freely after the sale, according to two bankers familiar with the decision.

Just to give you a guide the official rate was 8.9 earlier this week. What is it about currencies called the pound these days?! Mark Carney will already be very jealous of a currency fall which may not be over if the black market rates of 18 earlier this week are any guide. But there was something to give Governor Carney sleepless nights.

which included raising its two benchmark overnight interest rates by 3 percentage points.

The stock market loves it and is up by 8% this morning ( Governor Carney is interested) but bond yields are somewhere between 16% and 20% ( we just lost him).

Forward Guidance

There has been a lot of this from the Bank of England. This is from the August meeting.

  If the incoming data prove broadly consistent with the August Inflation Report forecast, a majority of members expect to support a further cut in Bank Rate to its effective lower bound at one of the MPC’s forthcoming meetings during the course of the year.

This has turned out to be an example of one form of forward guidance (about the economy) toppling another type of forward guidance on interest-rates or as Ben Broadbent said early last month.

It’s also that many economic indicators are in general very noisy, even at the best of times.

Ben weasels for a while but then gets to it.

All that said, there’s little doubt that the economy has performed better than surveys suggested immediately after the referendum and, although we aimed off those significantly, somewhat more strongly than our near term forecasts as well.

But you see it is all perfectly reasonable in Ben’s Ivory Tower.

Well, again, one shouldn’t rush to judgement here.

If his forecasting performance was judged like premiership football managers then he would have been sacked many times over. Oh and the pension fund deficits which policies he supported have driven higher are nothing to do with him unless those same policies boost the economy in which case they were.

Dame Shafik pointed out more explicitly that the Bank of England had been wrong.

For example, Bank staff have revised up their forecast for the mature estimate of GDP growth in Q3 to 0.3% from 0.1% at the time of the August Inflation Report.

You may note that it too was wrong by being too low but being consistently wrong does not bother her in fact she prefers her own opinion to the data.

That’s where monetary policy can help, and it seems likely to me that further monetary stimulus will be required at some point in order to help ensure that a slowdown in economic activity doesn’t turn into something more pernicious.

She is not only convinced she is right but has fantasies about the impact of a small interest-rate cut or more QE (Quantitative Easing).

A Bazooka versus a pea shooter

It often gets forgotten that the UK Pound was falling in 2016 before the EU leave vote however it was a gradual decline compared to the drop which they followed. However we opened the year with an effective or trade-weighted exchange-rate of 90.37 which is now 74.2. Thus if we use the old Bank of England rule of thumb this fall is equivalent to a 4% reduction in Bank Rate which would mean it would need to be -3.5% now for the same effect if the pound had not fallen.

Meanwhile our central planners cut by 0.25% and were hinting at a cut of 0.15% next week to 0.1%. In case you are wondering why not to 0%? My view is that they are afraid that the banks rickety IT systems might not be able to cope with the number zero.  Also there is the QE but they have not finished the original £60 billion yet and anyway these days they find themselves having to defend themselves against claims that it has damaging side-effects.

Personal Forward Guidance

After a weekend pre-planned media farce we were told this by the Bank of England.

In a letter to the Chancellor, published this evening (Monday 31 October), the Governor said he would extend his term to the end of June 2019.

This was not always so although we need to go to HM Parliament to find it as it has disappeared from the Bank of England website.

 Dr Carney himself told us of several reasons for his preference for a five year term: “A five-year term is the right managerial timeline to relaunch the Bank of England”

Anyway six is the new five or something like that! My opinion is that something similar to what Roman Abramovich does with footballers over 30 at Chelsea is at play. They get one year contract extensions with the implication that they need to be on their mettle. A short leash but not as short as sometimes seen at the Heseltines.

The economy

This has proved much more resilient than the Bank of England ( 0.1%) growth or the UK Treasury ( between -0.1% and -1%) . Instead we saw economic growth of 0.5% reported in the third quarter of 2016. This morning has seen the latest Market business survey series completed telling us this.

the dominant UK service sector moved up a gear at the start of the final quarter of 2016. The rate of growth of total business activity accelerated to the fastest since January, as did new business expansion.

This meant that they concluded this.

Business activity is growing at a rate consistent with solid economic growth of 0.4-0.5% in the fourth quarter (the surveys suggest the initial 0.5% GDP growth estimate for the third quarter could be revised slightly lower). What’s especially reassuring is that growth is also becoming more balanced.

Rebalancing? A lot of care is needed there! But the UK economy continues to grow. If we look at the money supply surge I discussed on Monday and the lower level of the UK Pound that should be no surprise.


Predicting future Bank of England decisions has a clear error element, not least for the Bank of England itself as today’s update on some of its “Forward Guidance” proves. Actually this is a common central planning theme as we note that the US Federal Reserve has not so far produced any of the “3-5” interest-rate rises promised. The fog is added to by it telling us moves are “data dependent” whilst Ben Broadbent in particular at the Bank of England seems to be telling is that acting on data is dependent on him agreeing with it.

Meanwhile the elephant in the room is the likely rise in inflation next year which the Bank of England plans to “look through”. Of course a stronger than expected economy combined with inflation was once a recipe for interest-rate rises but apparently no longer. But the Bank of England has a lot of explaining to do as to why it eased monetary policy into a stronger than expected economy and a currency fall.

I will update if there is anything significant in the press conference later.

1pm update

We have seen quite a U-Turn from the Bank of England today. It is simply summed up by this statement from Mark Carney.

While the Committee now expects stronger growth through the balance of this year, it is the fall in sterling that will have the more significant implications for the path to inflation at the monetary policy horizon.

In spite of the rather desperate effort to take the credit for it I notice that even the usually supine press corps have so far all pointed out the mistakes. Even worse for someone who has cut interest-rates the first question was about a Bank Rate rise!

As a piece of advice it is probably best not to pass questions onto Ben Broadbent as Ivory Tower style waffling trying to tell us that up is indeed the new down does not help.

Tip TV Finance

Here are my views from yesterday.

Fiscal reflation in US is inevitable, BOJ is a mess – Not A Yes Man Economics