The Bank of England is in a mess of its own making

Today is what is called Super Thursday at the Bank of England although if the brief history is any guide it rarely lives up to the moniker! Actually it is a bit like its Governor Mark Carney whose stewardship has been much more hype than substance.  Indeed only recently we saw that demonstrated by the Charlotte Hogg episode where someone was promoted to the Monetary Policy Committee ( MPC) who when quizzed by Parliament was ignorant of many of the details. In fact as the Deputy Governor for Markets she would have been in charge of the £445 billion QE portfolio a subject about which she knew so little the Treasury Select Committee suggested she spoke to the Debt Management Office ( so she could learn something…). Yet according to Bloomberg the official Bank of England view is from an alternative universe.

Her departure “came at a critical time and represented a material loss to the management of the bank,” the BOE’s Court of Directors said,

Indeed her sacking for breaking rules that she had set is apparently “entirely disproportionate”. The rules presumably were for the little people and proles not for the daughters of baroness’s and earls it would seem. In the same way that whistleblowing rules seem not to apply to Jes Staley of Barclays. By the way this is the banking sector which we are so often told is completely reformed.

Women Overboard

The Carney era has come with protestations of more diversity and at first it seemed like that as more women were appointed. But the more hype than substance theme has appeared in 2017 as they seem to be leaving to go elsewhere. The two women who were on the MPC have either left or are going. Ironically the planned replacement Charlotte Hogg lasted not much longer than a May Fly. Then on April 20th the Financial Times reported this.

Jenny Scott, the executive director for communications at the BoE, is leaving to “pursue new opportunities, including those in the third sector”, according to an internal memo sent to Bank staff on Wednesday.

This is so reminiscent of the Yes Prime Minister episode on equal opportunities where the woman concerned says this about the situation.

I find it  comic, but then it is ( the civil service) run by men after all…. most of the work here needs only about 2 O’Levels anyway.

It is also quite a change of tack from the Financial Times from its previous gushing reviews of what it called a “rock star” central banker.

The “Early Wire” Problem

One of Governor Carney’s reforms was that the MPC now votes the day before the announcement. So that at 12 pm today we will be told the results of yesterday’s vote. The danger is of it leaking and makes one wonder about this from the Financial Times.

Two MPC members thought to have voted for increase at latest meeting

That may or may not be right but before the event there are clear fears they may now especially at a time of warnings like this from the Royal Statistical Society.

One of our key requests in this regard is for the government to end the practice of pre-release access to official statistics, whereby ministers and their officials have access to official statistics before they are released to the public.

Forward Guidance

This has of course turned out to be a anything but as it quickly became something of an oxymoron. There were plenty of ch-ch-changes in it as reality proved regularly inconvenient but they were quickly dwarfed by promises of interest-rate rises suddenly metamorphosing into a Bank Rate cut last August. Down was indeed the new up.

Next there was the issue of the post EU leave vote forecasts which were completely wrong which was especially material when the Bank of England cut Bank Rate and added both an extra £60 billion of ordinary QE and £10 billion of Corporate Bond purchases in response to a slow down which never happened! It has responded with a PR campaign to say that its move averted a slow down which would have been a new experience for the UK economy as monetary policy moves have always been considered to fully impact some 18 months or so after the change. Even worse for the spinners at the Bank of England the ECB has offered the view that the lags are now in fact longer than in the past.

The economic outlook

The outlook for inflation has been a problem for the credibility of the Bank of England ever since it cut Bank Rate last August as it did so in spite of expectations of it going above target. It ignored the impact of a weaker Pound £ and ploughed ahead anyway and already we see that consumer inflation is above target and set to go higher. In terms of how much higher both we and the Bank of England have got lucky with the recent dip in oil prices and the stronger trajectory for the Pound £. That was symbolised for me yesterday as I passed a garage in Vauxhall selling a litre of both diesel and petrol for 115.2p. That one is always at the cheaper end of the spectrum but fuel prices at the pump have dipped.

If we move to the prospects for GDP then we are now in the phase which I thought was going to be the difficult bit which was when inflation impacted on real wages. Today’s output and trade data have been in line with that as they were weak. You can excuse the production data as it was affected by mild weather and consequent low electricity output which was 80% of the March fall but manufacturing and trade were both poor.

The overall trade deficit (goods and services) widened both in Quarter 1 2017 and in the month of March, primarily driven by an increase in imports of oil, chemicals, mechanical machinery and motor vehicles. The total trade deficit in Quarter 1 2017 widened by £5.7 billion to £10.5 billion………The monthly fall of 0.6% in manufacturing was broad-based across 8 of the 13 sub-sectors.

Comment

The Bank of England finds itself in a very awkward position for an activist central bank. The Governor has the obvious problem that he told us that the “lower bound” for Bank Rate was 0.5% and then cut it to 0.25%! Should we see a phase of sustained economic weakness then presumably he would vote to cut again ignoring the fact that at such levels the economic gains are in my opinion offset by the losses such as the rise in unsecured credit. Which brings me to my next point if we are going to have a crony culture at the Bank of England why do we need the other 8 MPC members? Any dissent is so rare and has never been policy changing under Mark Carney’s tenure. Indeed Kristin Forbes waited  until after announcing her departure to actually vote for an interest-rate rise confirming the theme of members getting hawkish on the way out. Perhaps the most extreme case of that was the uber dove David Miles who suddenly claimed he was on the edge of voting for  rate rise.

Today is likely to see at least one vote for a Bank Rate rise but does anybody reading this really feel there is any stomach on the MPC for one? The last sequence of votes for a rise faded and ended up in a cut. Also do they still know where the switch is?

 

 

 

Is this the end of the beginning for Quantitative Easing?

Today sees the Bank of England reach a threshold and but not yet a rubicon. This is because of this which it announced on last month.

As set out in the MPC’s statement of 2 February, the MPC has agreed to make £11.6bn of gilt purchases, financed by central bank reserves, to reinvest the cash flows associated with the maturity on 22 January 2017 of a gilt owned by the Asset Purchase Facility (APF).

This is an Operation Twist style manoeuvre where a Gilt matures and the Bank of England chooses to roll it forwards. Sometimes it does this a long way forwards as you see once a week a share of the funds have been put in what are called ultra-long Gilts which go out as far as 2068 ( of which it holds £1.54 billion). Creating an issue for our grandchildren and maybe great-grandchildren.  The details are shown below.

The Bank will continue, normally, to conduct three auctions a week: gilts with a residual maturity of 3-7 years will be purchased on Mondays; of over 15 years on Tuesdays; and of 7-15 years on Wednesdays. The Bank intends to purchase evenly across the three gilt maturity sectors. The size of auctions will initially be £775mn for each maturity sector.

There was a time when £775 million seemed a lot of money but in central banking terms these days that is plainly no longer so. This should have finished last Wednesday but the Bank of England chose not to act on that day, maybe it did not want to let go! But more seriously it avoids days of known political importance as a rule.

So a threshold has been reached but the Bank of England will be able to announce something on Thursday as last week another Gilt matured and some £6.1 billion of that will be able to be rolled forwards. So no doubt it will be time for Operation Twist to wake itself after only a few days of being asleep to start again!

Charlotte Hogg

Charlotte should logically be voting against any further Operation Twist style move if this exchange with the Treasury Select Committee was any guide.

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 it does not do any good either? I pointed this out on the first of this month.

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.

As to her own position people are more worried about her dissembling that her apparent lack of competence if this from Deborah Orr in the Guardian is any guide.

The trouble is that few people are likely to believe that not mentioning her brother’s job was an oversight. Even if they do, her judgment is still in question.

This bit does however mine a theme we have discussed on here many times.

Clearly, people run the risk of feeling over-entitled. They believe strongly in rules, but develop a belief that they are the people who make the rules, not the people who follow them……..Privileged people also run the risk of mistakenly believing that what’s good for them is good for everybody…….Finally, of course, privileged people assume, often rightly, that no one is going to hold them to account.

Sadly however the article seems completely unaware of the performance of Charlotte when questioned about monetary policy.

Hogg is clearly regarded as tremendously bright and capable.

More problems for the UK establishment

If you are intervening in so many areas then the need for honesty confidence and trust rises and yet we are also in an era where more issues are emerging. From the Wall Street Journal.

On average, between April 2011 and December 2016, U.K. government-bond futures correctly anticipated the rise or fall that ultimately happened when economic data were published, according to an analysis prepared for The Wall Street Journal by Alexander Kurov, associate professor of finance at West Virginia University.

Of course bond markets move on other days but there is a particular concern on these days because of this.

“The more prerelease access you have, the more likely it is that these things are going to be leaked,” said Hetan Shah, executive director of the Royal Statistical Society, the U.K.’s professional body for statisticians that has campaigned for several years to end such access.

At 9:30 am the day before release quite a large number of people ( 118 on the labour  market report)  get the numbers according to the WSJ.

Corporate Bond QE

This will continue but is of a much smaller size as there is only £2 billion left out of a total of £10 billion.. Regular readers will recall that I pointed out when it began that the Bank of England would struggle to mount any operation on a large scale because UK corporates issue a substantial proportion of their debt in Euros and US Dollars because they are often international businesses.  This has led the Bank of England on this road as I pointed out in early November.

The Bank of England is boosting the UK economy by buying the corporate bonds of Total and Maersk Oh hang on….

I was told they were back buying Maersk bonds last week. Also there is the issue of subsidising larger businesses who can issue corporate bonds versus ones which are too small to be able to afford the costs. That is awkward when you are claiming you are boosting the economy.

The ECB

It too is in a zone where ch-ch-changes are ahead. I have written several times already explaining that with inflation pretty much on target and economic growth having improved its rate of expansion of its balance sheet looks far to high even at the 60 billion Euros a month due in April. But the issue was highlighted by this which was on the newswires last week. From the Financial Times.

He warns investors not to rule out that the ECB could raise rates while it is still in the process of tapering its stimulus spending.

Well of course it could! Indeed the Bank of England has suggested it would raise interest-rates towards 2% before it started to reverse its own QE purchases. But the confusion around is highlighted by this seemingly being an issue.

Comment

There is a fair bit to consider at this time when the central bankers face the issue of stopping their stimulus policies. The Federal Reserve of the United States has signalled it will raise interest-rates for a third time in this phase later this week. But the Bank of England and ECB have not even entered the foothills and are still easing. If we move on from policy plainly being inappropriate we face the issue of what will bond markets do when the largest buyers disappear? Well we are getting hints as this from the twitter feed of Bond Vigilantes suggests.

10 year Swiss Government bonds offer a positive yield again, having traded in negative territory for almost 18 months.

Something of a shift has already taken place in the US with its ten-year Treasury Note yield being at 2.56% but with the ten-year Gilt at a mere 1.21% there is quite gap these days. Real yields are getting ever more negative as inflation moves ahead. From the BBC.

SSE has become the latest “big six” energy supplier to raise its prices.

It said average electricity prices would rise by 14.9% from 28 April for 2.8 million customers. However, it will keep its gas prices unchanged.

 

 

 

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.