Let me start with a positive which is that the Bank of England cut a much more professional image yesterday. Governor Andrew Bailey sat square on in a smart suit and avoided his past inclination to show a rather corpulent figure as he expounded on how others should tighten their belts. Even the absent-minded professor ( Deputy Governor Ben Broadbent ) had remembered to comb his hair ( I am assuming it was not done for him) rather than looking as if he had spent the morning standing in a wind tunnel.
As to policy there was a minor surprise.
- Bank Rate should be increased by 0.25 percentage points, to 5.25%.
Six members (Andrew Bailey, Ben Broadbent, Jon Cunliffe, Megan Greene, Huw Pill and Dave Ramsden) voted in favour of the proposition. Three members voted against the proposition. Two members (Jonathan Haskel and Catherine L Mann) preferred to increase Bank Rate by 0.5 percentage points, to 5.5%. Swati Dhingra preferred to maintain Bank Rate at 5%.
There has been a technical change in the sense that Megan Greene has replaced Silvana Tenreyro so there is one less vote for unchanged. It is too early to say whether Megan will always be in the “I agree with the Governor” camp. But the curiosity comes in the votes for a 0.5% as whilst Catherine Mann has been consistent Jonathan Haskel just looks lost at sea.
He argues that because the Bank of England is independent from government, it is better trusted to keep inflation under control. This trust helps to stop inflation becoming a long-term problem.
That was from November 2021 and looks awful now. We can review that in the light of the Governor’s claim yesterday that hindsight is unfair because I thought it was awful at the time. Now the main burst has passed he has become hard core or if you prefer he simply seems to be blowing in the wind.
The Press Conference
Again let me start with a positive which is Governor Bailey was able to say this and he liked it so much he opened with it.
Consumer price inflation fell further to 7.9% in June. That is what we expected to see. It is good news. And inflation will continue to fall over the coming months.
Actually they got their by getting the May move wrong ( it was too high) and then June falling by more. But let’s not be churlish as the Bank of England getting a forecast right is a rare event.
Things got a lot harder for the Governor as he told us.
We did not get monetary policy wrong.
Actually his own statement contradicted this as whilst the news below is welcome as an improvement inflation remains well above target, even in the October forecast.
Given Ofgem’s price cap on electricity and gas bills – and the way it slows down the pass through of wholesale energy prices to consumer bills – we expect inflation to
take a further step down in July’s data published in two weeks’ time, to around 7%, followed by another larger step down in October’s data, to around 5%.
I pointed out on social media that such a claim looked not a little silly when inflation had been 10% and in fact understated it.
The cost of living increased sharply across the UK during 2021 and 2022. The annual rate of inflation reached 11.1% in October 2022, a 41-year high, before easing in subsequent months. ( House of Commons)
Really he is like a football manager who has just lost 5-0 telling us his defence is sound. On a more technical level I suggest you look back to the words of Jonathan Haskel above as he and his colleagues were telling us inflation would in a word be Transitory when in fact the worst storm for decades was building. These days “Transitory” has been replaced by “Persistent” as ex ante morphs into ex post.
The MPC will continue to monitor closely indications of persistent inflationary pressures and resilience in the economy as a whole, including the tightness of labour
market conditions and the behaviour of wage growth and services price inflation. If there were to be evidence of more persistent pressures, then further tightening in monetary policy would be required.
There was another extraordinary claim from Governor Bailey.
We remain evidence driven.
However the crucial point is shown by his own words from September 2021.
Our forecast in August had inflation rising to 4% by the end of this year, and developments since then mean that inflation is likely to rise to slightly above 4%.
So the evidence was that inflation was twice its target, which remember was a really big deal at the time, and expected to go higher. So what did he do with the evidence?
Our view is that the price pressures will be transient – demand will shift back from goods to services, global supply chains are likely to repair themselves, and many commodity prices have demonstrated mean reverting tendencies over time.
Yes he ignored it. That will be how historians see his period as Governor. He is now peering rather myopically at this when it is to my mind simply a consequence of his failure in letting inflation rip.
In the MPC’s judgement, upside surprises on wage inflation suggest that it will take
longer for second-round effects to go away than it did for them to appear in response
to the sharp rises in the prices of many imported goods over 2021-22
Or if you prefer it in economic theory it is better to deal with first-round effects than second round ones. Pay continues to be a tricky subject for the Governor.
The Bank of England handed out more than £25m in staff bonuses last year, while telling ordinary workers not to ask for more money, openDemocracy can reveal.
Reform turns into more of the same
The Governor was keen to emphasise this.
I am delighted that Ben Bernanke has agreed to lead a review into the Bank’s forecasting and related processes. Dr Bernanke is a renowned and award-winning economist whose distinguished career makes him the ideal person to lead this review.
But sadly was not asked how that went with also promoting a Bank of England lifer?
HM Treasury has today announced that His Majesty The King has agreed, on the recommendation of the Chancellor and Prime Minister, to appoint Sarah Breeden as Deputy Governor of the Bank of England with responsibility for Financial Stability, starting on 1 November 2023.
What is her speciality?
Sarah also leads the Bank of England’s work on climate change, domestically and internationally, a role she has held since 2016.
Quantitative Tightening
Another move in policy slipped by in spite of their being a question in that arena. There was a big change in QT as highlighted here.
On 2 August 2023, the total stock of assets held for monetary policy purposes was £786 billion, comprising £785 billion of UK government bond purchases and £0.8 billion of sterling non‐financial investment‐grade corporate bond purchases.
That meant that around £15 billion of Bank of England bond holdings have matured recently with all sort of implications for the money supply amongst other things. But only I seem to be raising it. However as I mentioned there were a question for Dave ( Sir David to his friends) Ramsden about QT via bond sales. I looked at this on the 20 th July if you want the full picture but the basic part is that he wants to do more of it.
What was missed was how “markets specialist” Dave has performed in the bond market. He bought at the top and is now selling at the bottom. We do not know how much the Bank of England will lose but we do know that running losses are building ironically because it is now charging itself 5.25% per annum.
Regular readers will know I have long been a critic of the Bank of England QT plans on the basis that they were in mu opinion back then likely to lead to large losses, which is exactly how things have turned out.
Comment
Let me point out something that is rare. I agree with Swati Dhingra this time around. The Bank of England forecasts of future inflation rather made that point.
inflation is more likely to end the forecast period below the 2% target than above it, if only slightly. In the modal – or
‘most likely’ – case, inflation is 1.7% in two years’ time and 1.5% in the third quarter of 2026.
It is likely to be only temporary as she has been against interest-rate rises in general and seems obsessed with Brexit. But I like to be fair.
The problem for the Governor here came when Francine Lacqua of Bloomberg asked him when the “interest-rate cuts” were coming? After all he had claimed to be following the evidence and could hardly claim he does not believe his own forecasts…..
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