What next for the Bank of England?

Today is what used to be called Super Thursday for the Bank of England. It was one of the “improvements” of the current Governor Mark Carney which have turned out to be anything but. However he is not finished yet.

Starting on 7 November, the Bank of England Inflation Report is to become the Monetary Policy Report. The Report is also to undergo some changes to its structure and content.

These changes are part of the Bank’s ongoing efforts to improve its communications and ensure that those outside the institution have the information they need in order to understand our policy decisions and to hold us to account.

Really why is this?

The very latest changes represent the next step in the evolution of our communications.

I suppose when you tell people you are going to raise interest-rates and then end up cutting them you communication does need to evolve!

Communication let me down,
And I’m left here
Communication let me down,
And I’m left here, I’m left here again! ( Spandau Ballet )

The London Whale

There was so news this morning to attract the attention of a hedge fund which holds some £435 billion of UK Gilt securities as well as a clear implication for its £10 billion of Corporate Bonds. From the Financial Times.

Pimco, one of the world’s largest bond investors, is giving UK government debt a wide berth, reflecting concerns that a post-election borrowing binge promised by all the major political parties could add to pressure on prices. Andrew Balls, Pimco’s chief investment officer for global fixed income, said the measly yields on offer from gilts already makes them one of Pimco’s “least favourite” markets. The prospect of increased sales of gilts to fund more government spending makes the current high prices even less attractive, he said, forecasting that the cost of UK government borrowing would rise.

Yes Andrew Balls is the brother of Ed and he went further.

“Gilt yields look too low in general. If you don’t need to own them it makes sense to be underweight,” he told the Financial Times.

Actually pretty much every bond market looks like that at the moment. Also as I pointed out only yesterday bond markets have retraced a bit recently.

The cost of financing UK government debt has been rising over the past month. The 10-year gilt yield has reached 0.76 per cent, from 0.42 per cent in early October. That remains unattractive compared with the 1.84 per cent yield available on the equivalent US government bond, according to Mr Balls,

Mind you there is a double-play here which goes as follows. If you were a large holder of Gilts you might be pleased that Pimco are bearish because before one of the biggest rallies of all time they told us this.

Bond king Bill Gross has highlighted the countries investors should be wary of in 2010, singling out the UK in particular as a ‘must avoid’, with its gilts resting ‘on a bed of nitroglycerine.’ ( CityWire in 2010 ).

Also there is the fact that the biggest driver of UK Gilt yields is the Bank of England itself with prospects of future buying eclipsing even the impact of its current large holding.

House Prices

As the Bank of England under Mark Carney is the very model of a modern central banker a chill will have run down its spine this morning.

Average house prices continued to slow in October, with a modest rise of 0.9% over the past year. While
this is the lowest growth seen in 2019, it again extends the largely flat trend which has taken hold over
recent months ( Halifax)

Indeed I suggest that whoever has to tell Governor Carney this at the morning meeting has made sure his espresso is double-strength.

On a monthly basis, house prices fell by 0.1%

This is the new reformed Halifax price index as it was ploughing rather a lonely furrow before. We of course think that this is good news as it gives us another signal that wages are gaining ground relative to house prices whereas the Bank of England has a view similar to that of Donald Trump.

Stock Markets (all three) hit another ALL TIME & HISTORIC HIGH yesterday! You are sooo lucky to have me as your President (just kidding!). Spend your money well!

The Economy

This is an awkward one for the Bank of England as we are on the road to a General Election and the economy is only growing slowly. Indeed according to the Markit PMI business survey may not be growing at all.

The October reading is historically consistent with GDP
declining at a quarterly rate of 0.1%, similar to the pace
of contraction in GDP signalled by the surveys in the third
quarter

Although even Markit have had to face up to the fact that they have been missing the target in recent times.

While official data may indicate more robust growth
in the third quarter, the PMI warns that some of this could
merely reflect a pay-back from a steeper decline than
signalled by the surveys in the second quarter, and that the
underlying business trend remains one of stagnation at
best.

The actual data we have will be updated on Monday but for now we have this.

Rolling three-month growth was 0.3% in August 2019.

So we have some growth or did until August.

The international environment is far from inspiring as this just released by the European Commission highlights.

Euro area gross domestic product (GDP) is now forecast to expand by 1.1% in 2019 and by 1.2% in 2020 and 2021. Compared to the Summer 2019 Economic Forecast (published in July), the growth forecast has been downgraded by 0.1 percentage point in 2019 (from 1.2%) and 0.2 percentage points in 2020 (from 1.4%).

The idea that they can forecast to 0.1% is of course laughable so it is the direction of travel that is the main message here.

Comment

If we move on from the shuffling of deckchairs at the Bank of England we see that its Forward Guidance remains a mess. From the September Minutes.

In the event of greater clarity that the economy is on a path to a smooth Brexit, and assuming some recovery in global growth, a significant margin of excess demand is likely to build in the medium term. Were that to occur, the Committee judges that increases in interest rates, at a gradual pace and to a limited extent, would be appropriate to return inflation sustainably to the 2% target.

Does anybody actually believe they will raise interest-rates? If we move to investors so from talk to action we see that in spite of the recent fall in the Gilt market the five-year yield is 0.53% so it continues to suggest a cut not a rise.

More specifically there was a road to a Bank of England rate cut today as this from the 28th of September from Michael Saunders highlights and the emphasis is minr.

In such a scenario – not a no-deal Brexit, but persistently high uncertainty – it probably will be
appropriate to maintain an expansionary monetary policy stance and perhaps to loosen further.

He was an and maybe the only advocate for higher interest-rates so now is a categorised as a flip-flopper. But it suggested a turn in the view of the Bank in general such that this was suggested yesterday by @CNBCJou.

Looking forward to the BOE tomorrow where the new MONETARY POLICY REPORT will be presented (not to be confused with the now defunct INFLATION REPORT). A giant leap for central banking. * pro tip: watch out for dovish dissenters (Saunders, Vlieghe?) $GBP

The election is of course what has stymied the road to a return to the emergency Bank Rate of 0.5% as we wait to see how the Bank of England twists and turns today. Dire Straits anyone

I’m a twisting fool
Just twisting, yeah, twisting
Twisting by the pool

The Investing Channel

 

 

What use is Forward Guidance that keeps being wrong?

Last night brought one of the most anticipated U-Turns in monetary policy as the US Federal Reserve announced this.

In light of the implications of global developments for the economic outlook as well as muted inflation pressures, the Committee decided to lower the target range for the federal funds rate to 2 to 2-1/4 percent.

Thus we saw the expected interest-rate cut of 0.25% and there was also an accelerated end to the era of QT ( Quantitative Tightening).

The Committee will conclude the reduction of its aggregate securities holdings in the System Open Market Account in August, two months earlier than previously indicated.

Whilst we are on the subject let us use the words of the Clash as we may not see QT again and we certainly will not be seeing it for a while.

Yeah, wave bye, bye

At this point on a superficial level this looks like a success for Forward Guidance as the Treasury Note ten-year yield around the 2.04% level where it had started. But there are two big catches with this. The first revolves around when economic agents were making plans for 2019 because back then the Federal Reserve was talking of “normalisation” which involved 4 then 3 then 2 interest-rate increases in 2019. Now we have a cut and as I will discuss later am expecting another.

Last Night

The response of observers to the effort to provide new Forward Guidance by Chair Jerome Powell was to sing  along with The Strokes.

And say, people, they don’t understand
Your girlfriends, they can’t understand
Your grandsons, they won’t understand
On top of this, I ain’t ever gonna understand

Here via CNBC was his opening effort.

Looking at the history of the Fed, Powell cautioned against assuming that this week’s cut is the beginning of the cycles that happened in the past.

“That refers back to other times when the FOMC has cut rates in the middle of a cycle and I’m contrasting it there with the beginning of a lengthy cutting cycle,” he said. “That is not what we’re seeing now, that’s not our perspective now.”

So it was “one and done” was it? I doubt anyone including Chair Powell actually believed that especially if they looked at the knee-jerk response which was for a stronger US Dollar. Indeed in the same press conference he seemed to correct himself.

“Let me be clear: What I said was it’s not the beginning of a long series of rate cuts,” Powell said. “I didn’t say it’s just one or anything like that. ( CNBC )

He also managed to talk about interest-rate rises for a while as things got even more out of control. So you could have pretty much any view you like as we had guidance towards no more cuts,more cuts and perhaps rises too. That is quite a fail when the scale of your operations which already are the elephant in the room are about to get larger.

Oh and did I mention an elephant in the room?

What the Market wanted to hear from Jay Powell and the Federal Reserve was that this was the beginning of a lengthy and aggressive rate-cutting cycle which would keep pace with China, The European Union and other countries around the world……..As usual, Powell let us down, but at least he is ending quantitative tightening, which shouldn’t have started in the first place – no inflation. We are winning anyway, but I am certainly not getting much help from the Federal Reserve!

That was of course President Trump who may tweet excitedly but so far has given us better forward guidance than the Fed. Who will bet against the US Federal Reserve making another interest-rate cut this year?

European Central Bank

The ECB has been on a not dissimilar road to the Federal Reserve. I am sure the “ECB Watchers” would like us to forget that they were predicting an increase in the Deposit Rate this year as a result of their inside knowledge. They of course ended up scuttling away into the dark but the ECB kept this up until the 18th of June.

We now expect them to remain at their present levels at least through the first half of 2020, and in any case for as long as necessary to ensure the continued sustained convergence of inflation to levels that are below, but close to, 2% over the medium term.

The informal hint that a change was on it way provided by Mario Draghi on the 18th of June became formal a week ago.

We expect them to remain at their present or lower levels at least through the first half of 2020, and in any case for as long as necessary to ensure the continued sustained convergence of inflation to our aim over the medium term.

So not as grand a scale as the Federal Reserve but up has become the new down here too, or to be more precise is on its way in September. Assuming of course this guidance is correct.

Bank of England

Governor Carney has been even slower on the uptake than his international colleagues. As 2019 has progressed and we have seen interest-rate cuts proliferate he has cut an increasingly isolated figure.

The Committee continues to judge that, were the economy to develop broadly in line with its May Inflation Report projections that included an assumption of a smooth Brexit, an ongoing tightening of monetary policy over the forecast period, at a gradual pace and to a limited extent, would be appropriate to return inflation sustainably to the 2% target at a conventional horizon.

It is revealing that the sentence needs to be so long but the message is that the plan is to tighten monetary policy and apparently ignore the rush in the other direction. More realistically of course the reality is that we should be prepared for the return of the Unreliable Boyfriend as he has a track record of cutting interest-rates after promising rises.

Also this is revealing.

Mark Carney, Governor of the Bank of England says “there will be great fortunes made” for companies preparing for and tackling climate change. ( Channel 4 News)

These days he seems to spend much of his time discussing climate change. If we skip the issue of him having both no mandate and indeed no qualifications in this area we find that he is deflecting us from his troubles with monetary policy. From his personal point of view discussing it is also part of his application for the IMF job.

Meanwhile as we move through the “Super Thursday” procedure he constructed I hope the media will concentrate on how he is forecasting interest-rate increases in the current economic environment.

Comment

It is more than six years ago that Michael Woodford told us this.

Greater clarity within the policy committee itself about the way in which policy is expected to be conducted in the future is likely to lead to more coherent policy decisions, and greater clarity on the part of the public as to how policy will be conducted is likely to improve the degree to which the central bank can count on achieving the effects that it intends through its policy.

As you can see the initial point failed last night as Chair Powell was pretty incoherent. Whilst Mario Draghi of the ECB is a much more professional operator he too struggled at his last press conference on the subject of the inflation target. It is about to be Governor Carney’s turn to face the music and he is usually the most incoherent. This means that they cannot give the public “greater clarity” and in fact have misled them which means they are undermining their own policies.

Of course there is also the Riksbank of Sweden to make the others feel better.

Me on The Investing Channel

 

 

 

 

Central Banks have a big problem with the future

A feature of 2019 so far has been a succession of U-Turns by central banks and by two of the world’s major central banks in particular. This has been most marked at the US Federal Reserve where it was not so long ago that some were suggesting we would see four interest-rate increases ( of 0.25%) this year on the road to what was called normalisation. Regular readers will recall that we were one of the few places that were troubled by the fact that we simply do not know what and where normal is anymore. But for our purposes today the main issue is that the US Federal Reserve looks set to cut later this month and perhaps one more time in 2019. Should that scenario come to pass then the previous concensus will have been wrong by a net 6 interest-rate changes. Seeing as interest-rates are so low these days that is quite an achievement.

This is on my mind because if we take the advice of Kylie Minogue and step back in time just under 7 years central banks were heavily influenced by this from Micheal Woodford and Jackson Hole.

The first of these is forward guidance — explicit statements by a central bank about the outlook for future policy, in addition to its announcements about the immediate policy actions that it is undertaking.

This was always going to be adopted as it flattered central banking egos and provided an alternative at a time when central bankers were afraid of being “maxxed out”. But as my opening paragraph pointed out it has been a complete failure in recent times in the United States where it began.

Europe

This has been something of a two stage failure process for Forward Guidance. The opening part got some intellectual backing last September from Benoit Coeure of the ECB.

Communicating our expectation that the ECB key interest rates would remain at their present levels at least through the summer of 2019 was therefore consistent with the “risk management” approach to monetary policy that the Governing Council has repeatedly applied in recent years,

This had two steps as it was perceived like this.

Yet, on my next slide you can see that, at some point in early 2018, markets expected the ECB to hike its deposit facility rate one month after the expected end of net asset purchases.

So that was a bit of a fail and it continued long after this speech. It was something I found hard to believe but the idea that the ECB would raise interest-rates in 2019 was like these lyrics from Hotel California.

And in the master’s chambers
They gathered for the feast
They stab it with their steely knives
But they just can’t kill the beast.

It seemed to exist in an evidence-free zone but somehow survived. But events recently took a dreadful turn for it and by implication ECB Forward Guidance.

In the absence of improvement, such that the sustained return of inflation to our aim is threatened, additional stimulus will be required……..This applies to all instruments of our monetary policy stance. Further cuts in policy interest rates and mitigating measures to contain any side effects remain part of our tools.

So the interest-rate rises had not only morphed into unchanged but now we were being forward guided to a cut. Could that be any worse? Apparently it can as the incoming ECB President switches to downplaying the size of the interest-rate cuts on the horizon.

*IMF SAYS THERE MAY ONLY BE LIMITED ROOM FOR ECB RATE CUTS ( @lemasabachthani )

But apparently forward guidance is another beast that our steely knives cannot kill.

We remain able to enhance our forward guidance by adjusting its bias and its conditionality to account for variations in the adjustment path of inflation.

Bank of England

Gertjan Vlieghe has given a speech on this subject and he is in the mood for change and I do not blame him but sadly it does not start well.

In particular, communicating more about the Monetary Policy Committee’s preferred future path of interest rates
would be easier to understand than our current approach.

Preferred? I would prefer England to win the cricket world cup final on Sunday but a balanced reality involves looking at the strengths of New Zealand. Also it is not often central bankers do humour and when they do it is mostly unintentional.

Global central banks have changed their outlook for policy significantly in recent months.

He has a go at placing a smokescreen over events as well.

and the UK outlook for monetary policy continues to be materially affected by Brexit uncertainty.

This is misleading in my view mostly because none of us know what will happen so we cannot allow for it. Even if you think there is an effect right now then it is too late to do anything about it because an interest-rate move takes around 18 months to fully impact.

It feels for a while that we are getting some honesty.

Before diving into the details of the argument I want to stress that a far bigger challenge to monetary policy is
that the future is uncertain, and my suggested communications improvement will not change that. Today’s
preferred path of interest rates will change tomorrow, if the economy turns out differently from what we
expected.

But sadly as so often with Gertjan he drops the ball at the crucial point.

But I am arguing that we can achieve a modest improvement in the understanding that
businesses, households and financial markets have of what our objectives are, and what we think we need
to do to meet those objectives.

Most people only vaguely know who they are at best, so they idea they will be hanging on their every word is laughable. Financial markets do, of course, but how much of the real economy gets missed out?

The next bit reminds me of this from Queen.

Is this the real life?
Is this just fantasy?

Here is Gertjan pedalling hard.

Moreover, the Swedish central bank reported that the quality of its own internal deliberations and discussions
with staff had improved, and that discussion of monetary policy by external observers had become “less
speculative”

Meanwhile if we go back to real life.

The Riksbank has become pretty much a laughing-stock.

Comment

As you can see Forward Guidance has been one of the failures of our times. On an internal level down keeps being the new up but also it is part of a framework where the environment keeps getting worse. What I mean by that is after all the policy accommodation economic growth now has a “speed limit” of 1.5% and 2019 is proving to be a difficult year for the world economy. It flatters central banking egos, gives markets a hare to chase and journalists something to copy and paste, but not so much for the real economy.

The piece de resistance to all this is provided by Gertjan who you may recall has been Forward Guiding us to interest-rate increases for a while now. He has another go.

This would justify further limited and gradual rate increases, such that we might reach 1.00% in a year’s time,
1.25% in two years’ time, and 1.75% in three years’ time, with large uncertainty bands around this central
path.

You may notice the use of the word “might” here. Whereas he seems a lot more sure about this road.

On balance I think it is more likely that I would move to cut Bank Rate towards the effective lower bound of close to 0% in the event of a no deal scenario.

Just for clarity the Bank of England now thinks this is at 0.1% after assuring us for quite a long period ( Governor Carney repeated it more than once) that it was 0.5%.

So if we just look at Gertjan’s career at the Bank of England he looks ro be pointing us towards a situation where he has twice “Forward Guided” us to interest-rate increases and then cut them! I await your thoughts on how useful you think he will have been in such a scenario?

Governor Carney sees his interest-rate promises crumble again

Yesterday was quite a day in the life of Bank of England Governor Mark Carney as he faced the problems created by his own Forward Guidance on interest-rates, but later saw one of his hopes and dreams hover tantilisingly in the distance. It will have provided some variety as he pressed the control P button to make sure plenty of copies of his CV were ready to be sent to the International Monetary Fund rather than the usual printing of money. I will look more later at the developments there which had a side-effect of putting a tsunami through even the most fanatical adherents to the cult that continues to claim central banks are politically independent.

Also he was something of a TV star as well as apparently co-writing the script for the BBC2 documentary on the Bank of England.

The Bank is responsible for ensuring our money holds its value and it works tirelessly to protect the economy from the threat of high inflation.

Back to his current job

Governor Carney gave a speech to the Local Government Association and opened with a sentence which seemed to apply to the Bank of England.

These productions will mix tragedy and
comedy in a play whose themes range from magic and creation to betrayal and revenge.

Also if we move on from the PR spinning of the BBC documentary the Governor has a problem which he summarised like this.

In recent months, the expected paths of policy interest rates in advanced economies have shifted sharply
lower, most notably in the US where an expectation of two further rate hikes over the next three years has
flipped to four rate cuts by the end of next year. In the euro area, markets have begun to price in further rate
reductions and asset purchases

He could have mentioned that the Reserve Bank of Australia had cut interest-rates at two meetings in a row that day, which repeated what the Reserve Bank of India had already done earlier in 2019.

This is a problem because he has been giving Forward Guidance about interest-rate increases as the rest of the world has been planning for cuts. Here is how he explained this.

If Brexit progresses smoothly, we expect that the current heightened uncertainties facing companies and
households will fade gradually, business investment will rebound, the housing market to rally, and
consumption to grow broadly in line with households’ real incomes. This would accelerate economic growth,
strengthen domestic inflationary pressures, and require limited and gradual increases in interest rates in
order to return inflation sustainably to the 2% target.

So the UK economy would be able to stand aside from the trends affecting the rest of the world? For a country where trade is a very important part of the economy this is just a fantasy. What is an unreliable boyfriend to do in such circumstances? Step one is of course to put the blame elsewhere.

It is unsurprising that the path of interest rates consistent with achieving the inflation target in this scenario
differs from current market pricing of a lower expected path for Bank Rate given that the market places
significant weights on both the probability of No Deal and on cuts in Bank Rate in that event.

Yes the Brexit Klaxon has been deployed yet again by Governor Carney. This is an attempt to put a smokescreen over the fact that the world economy has been slowing for nearly a year now. After all the economy of Germany contracted in the third quarter of 2018. This morning’s weakening of the Caixin PMI in China notes that today’s weaker number for June is the lowest since October last year. Or to point it another way the attempt by Governor Carney to claim trade tariff problems started in May is an innovative version of history.

Actually in the course of a mere three sentences the Governor contradicts himself.

It just highlights the extent to which the levels of interest rates, sterling and other asset prices might increase if a deal were reached.

Becomes this.

We will also make a detailed assessment of the potential implications of the global sea change currently
underway.

In a smooth Brexit sterling and asset prices are likely to rise although of course many equities do not like higher sterling. But interest-rates higher in a “global sea change”?

Markets

The antennae of financial markets quickly picked up the hint that the unreliable boyfriend was limbering up to go on tour again. This saw the UK Gilt market continue its recent bull run and led to a couple of developments that will have embarrassed Governor Carney. Firstly the UK ten-year Gilt yield fell below the 0.75% Bank Rate and is 0.7% as I type this. Even more so both the two and five-year yields have fallen to 0.5% this morning so they are implying a 0.25% cut which is precisely the opposite of the rises in the Forward Guidance of Governor Carney.

Just as a reminder here is the BBC from the second of May.

Interest rate increases could be “more frequent” than expected if the economy performs as the Bank of England is expecting, governor Mark Carney says.

UK economy

There are doubts as to how accurate the Markit PMI business surveys are as we have seen them get things wrong such as late summer 2016 in the UK. But we also know that the Bank of England looks at it closely as it used it as a signal on its way to cutting Bank Rate to 0.25% in August of that year. So many eyes in Threadneedle Street will have been on this.

At 49.2 in June, the seasonally adjusted All Sector Output
Index fell from 50.7 in May and signalled a reduction in
overall private sector business activity for the first time in 35 months.

This was because the services sector at 50.2 was unable to offset the weaker manufacturing and construction estimates.

Comment

Governor Carney is preparing for yet another U-Turn as his Forward Guidance crumbles yet again in the face of reality. As a consistently unreliable boyfriend I guess he has a list of excuses ready for this. Yet as the day developed there was a further double-swing. The announcement that Christine Lagarde would leave the IMF and become President of the ECB had one clear positive for Governor Carney as the job he has long coveted suddenly became available hence my CV reference earlier. Perhaps he will discover some French ancestry too.

But this had a much more problematic swing as I note the words of the UK Chancellor Philip Hammond.

UK’s Hammond says Bank of England must not be politicized.

That initially provoked thoughts of the current Governor who attracted criticism for playing politics in his time as Governor of the Bank of Canada and has repeated that in the UK. However the appointment of a former French Finance Minister to head the ECB destroyed any fantasies of central banks being politically independent. After all she will be working with a Vice President ( De Guindos) who was formerly the Spanish Finance Minister. Can anybody spot a trend here?

This brought out a barrage of Fake News. For example Madame Lagarde was described as having a good reputation as others were pointing out this.

Useful reminder: Lagarde was judged guilty of gross negligence (ahem) by a French court over the insane payment to Bernard Tapie in the Credit Lyonnais case but escaped the one year jail sentence because (quoting) Of her « personnality» and “international reputation” and the fact that at the time she was fighting an « international financial crisis » ( @jeuasommenulle )

There was a time when being convicted in a fraud case would debar you from any sort of financial role let alone major ones. In the ordinary person’s world the CV would simply have been rejected. Still some places are managing to report that the ECB is safe from political interference now which really is an insult to readers.

Even the supporters of Madame Lagarde seem to be a bit thin on evidence that she has any real grasp of monetary policy. We do know that she helped put the Greek economy into an economic depression with the “shock and awe” policies of 2010 and 11 which she so vociferously supported. So in conclusion it was a good idea to pick a woman but a really bad idea to choose her.

Mark Carney claims “this is not a debt fuelled expansion” and interest-rates will rise “sooner than markets expect” yet again!

One of the features of the credit crunch era is the way that those in authority so often get given pretty much a free pass from the media, This is illustrated starkly by the BBC’s senior economics correspondent Dharshini David.

Today the Bank of England’s Governor admitted to me that rates are likely to rise faster than the markets expect. So when can we expect the first move? My analysis for

Perhaps Dharshini was giddy after being given the first question at the press conference. Sadly she asked a question which might have been written by Governor Carney himself and accordingly he seemed like Roger Federer as he volleyed it nonchalantly at the net.

Missing is any questioning of the assertion such as pointing out Governor Carney told us that interest-rates would rise “sooner than markets expect” in his Mansion House speech in June 2014. When this did not happen he acquired this moniker.

The Bank of England has acted like an “unreliable boyfriend” in hints over interest rate rises, according to MP Pat McFadden. ( BBC)

The reality was that his next move was to cut interest-rates In August 2016 followed by promises of another cut that November before yet another U-Turn. Then there was another U-Turn just over a year ago which if you recall was followed by a sharp drop in the value of the Pound £.

So you can see that it is really rather extraordinary that Dharshini either ignored or is unaware of this. I am not sure what to make of the sentence below.

But that doesn’t mean that Mark Carney or his colleagues are asleep at the wheel.

She was nearer the mark with this.

Report press conference was perhaps unprecedented number of female hacks… taken a while but face of financial journalism is changing, all the better to reflect our audiences

However there was no mention of the “woman  overboard” problem at the Bank of England which was illustrated by the 100% middle-aged male make up of its panel. The press conference highlighted this as in response to a question about diversity at the Bank of England Governor Carney responded with a barrage of “ums” and “ers”.

Still we can have a wry smile at this.

Growth actually isn’t that different to what was expected a year ago……..UK growth in the first quarter is likely to have been 0.5%, double what the Bank expected just three months ago.

Governor Carney kept pointing to the former forecast as he had a rare opportunity to bathe in a correct forecast, although he was not challenged on why they then cut the growth forecast to 0.2% so recently?

Pinocchio

In response to a rather good question about the growth of fixed-rate mortgages and its effect on the responsiveness of the economy to Bank Rate changes the Governor claimed this was nothing to do with him.  Nobody pointed out that in his first phase of Forward Guidance promising interest-rate increases there were people who were listening to him as there was a shift towards foxed-rate mortgages. Sadly, they were then shafted when Governor Carney cut interest-rates.

The point above was in a way the media catching up with one of my earliest themes from 2010 as I pointed out how market interest-rates were following official ones much less closely than before. However there was an even bigger humdinger out of Governor Carney’s mouth.

This is not a debt fuelled expansion

He has said this before and there are two main issues with this. The first is that the main policy over his tenure has been the funding for lending scheme which turned net mortgage lending positive. So more debt as shown by Wednesday’s figures.

Net lending for mortgages increased to £4.1 billion in March.

In the month before Governor Carney’s arrival the net increase was £785 million and whilst the rise has not been smooth ( early 2016 saw an incredible surge due to the buy to let changes) I think the numbers speak for themselves

Also the past three years or so has seen quite an extraordinary surge in unsecured credit something which I have been regularly documenting. It was £156.4 billion and is now around 38% higher at £216.7 billion. Can anybody think of anything else that has risen that fast as wage growth and GDP have been left far behind?

A factor in this has been something we have followed closely and was highlighted by the Office of Budget Responsibility.

 Data from the Finance & Leasing Association suggest that, between 2012 and 2016, dealership car finance contributed around three-fifths of the growth in total net consumer credit flows. Within that, around four-fifths reflected strong growth in car sales, with the remainder accounted for by a higher proportion of cars bought using dealership car finance.

So “this is not a debt fuelled recovery” means we have pumped up mortgage lending and seen quite a surge in car finance.

Inflation

Sadly for those who parroted the Bank of England line there was this. From @NicTrades

Bank of England Carney signals more than 1 hike may be needed to keep inflation in Check, while at the same time he cuts inflation forecasts.

Thus according to its inflation targeting regime an interest-rate increase is less and not more likely. Even worse the absent-minded professor Ben Broadbent gave us quite a spiel on oil markets as he tried to look on the ball, but to anyone market savvy that will have backfired too as they will have been thinking that the oil price has been falling recently. The price of a barrel of Brent Crude Oil is as I type this nearly US $5 lower since President Trump indulged in his own open mouth operation on Twitter last Friday.

Comment

The era of Forward Guidance has turned out to be anything but for the Bank of England. Governor Carney seems to have set the boy who cried wolf as his role model and the fact that he has actively misled people gets mostly overlooked. Still let us hope he is right that UK GDP grew by 0.5% in the first quarter of this year. If true that will also pose a question for the Markit series of business surveys.

At 50.9 in April, up from 50.0 in March, the seasonally
adjusted All Sector Output Index revealed a return to growth for private sector business activity.

Meanwhile our supposed football fan missed an opportunity that was taken by the ECB.

Best of luck to our local team for tonight’s semi-final!

Perhaps I am more sensitive on that front as I am a Chelsea fan, but Arsenal fans may wonder too.

 

 

India is facing its own version of a credit crunch

Travel broadens the mind so they say so let us tale a trip to the sub-continent and to India in particular. There the Reserve Bank of India has announced this.

On the basis of an assessment of the current and evolving macroeconomic situation, the Monetary Policy Committee (MPC) at its meeting today decided to: reduce the policy repo rate under the liquidity adjustment facility (LAF) by 25 basis points to 6.0 per cent from 6.25 per cent with immediate effect.

Consequently, the reverse repo rate under the LAF stands adjusted to 5.75 per cent, and the marginal
standing facility (MSF) rate and the Bank Rate to 6.25 per cent.

The MPC also decided to maintain the neutral monetary policy stance.

So yet another interest-rate cut to add to the multitude in the credit crunch era and it follows sharp on the heels of this.

In its February 2019 meeting, the MPC decided to
reduce the policy repo rate by 25 basis points (bps)
by a majority of 4-2 and was unanimous in voting
for switching its stance to neutral from calibrated
tightening.

This time around the vote was again 4-2 so there is a reasonable amount of dissent about this at the RBI.

What has caused this?

The formal monetary policy statement tells us this.

Taking into consideration these factors and assuming a normal monsoon in 2019,the path of CPI inflation is revised downwards to 2.4 per cent in Q4:2018-19, 2.9-3.0 per cent in H1:2019-20 and 3.5-3.8 per cent in H2:2019-20, with risks broadly balanced.

That path is below the annual inflation target of 4% (+ or – 2%) so it is in line with that.

However we know that central banks may talk about inflation targeting but supporting the economy is invariably a factor and can override the former. The Economic Times points us that way quoting the Governor’s words.

“The MPC notes that the output gap remains negative and the domestic economy is facing headwinds, especially on the global front,” RBI governor Shaktikanta Das said. “The need is to strengthen domestic growth impulses by spurring private investment which has remained sluggish.”

I will park for the moment the appearance of the discredited output gap theory and look at economic growth. The opener is very familiar for these times which is to blame foreigners.

Since the last MPC meeting in February 2019, global economic activity has been losing pace……The monetary policy stances of the US Fed and central banks in other major advanced economies (AEs) have turned dovish.

I would ask what is Indian for “Johnny Foreigner”? But of course more than a few might say it in English. But if we switch to the Indian economy we are told this in the formal report.

Since the release of the Monetary Policy Report (MPR)
of October 2018, the macroeconomic setting for the
conduct of monetary policy has undergone significant
shifts. After averaging close to 8 per cent through
Q3:2017-18 to Q1:2018-19, domestic economic
activity lost speed.

So a slowing economy which is specified in the announcement statement.

GDP growth for 2019-20 is projected at 7.2 per cent – in the range of 6.8-7.1 per cent in H1:2019-20 and 7.3-7.4 per cent in H2 – with risks evenly balanced.

That is more likely to be the real reason for the move and the Markit PMI released this morning backs it up.

The slowdown in service sector growth was
matched by a cooling manufacturing industry.
Following strong readings previously in this quarter,
the disappointing figures for March meant that the
quarterly figure for the combined Composite Output
Index at the end of FY 2018 was down from Q3.

The actual reading was 52.7 but we also need to note that this is in an economy expecting annual economic growth of around 7% so we need to recalibrate. On that road we see a decline for the mid 54s which backs up the slowing theme.

Forward Guidance

We regularly find ourselves observing problems with this and the truth is that as a concept it is deeply flawed and yet again it has turned out to be actively misleading. Here is the RBI version.

The MPC maintained status quo on the policy repo rate in its October 2018 meeting (with a majority of 5-1) but switched stance from neutral to calibrated tightening.

So it led people to expect interest-rate rises and confirmed this in December. I am not sure it could have gone much more than cutting at the next two policy meetings. That is even worse than Mark Carney and the Bank of England.

Output Gap

Regular readers know my views on this concept which in practice has turned out to be meaningless and here is the RBI version. From the latter period of last year.

the virtual closing of the output
gap.

Whereas now.

The MPC notes that the output gap remains negative and the domestic economy is facing
headwinds, especially on the global front. The need is to strengthen domestic growth impulses by
spurring private investment which has remained sluggish

Yet economic growth has been at around 7% per annum. I hope that they get called out on this.

The banks

We have looked before at India’s troubled banking sector and since then there has been more aid and nationalisations. Here is CNBC summing up some of it yesterday.

Over the last several years, a banking sector crisis in India has left many lenders hamstrung and impeded their ability to issue loans. Banks and financial institutions, a key source of funding for Indian companies, hold over $146 billion of bad debt, according to Reuters.

That may be more of a troubled road as India’s courts block part of the RBI plan for this.

But such things do impact monetary transmission.

Analysts said the transmission of the previous rate cut in February did not materialise as liquidity remained tight. Despite the central bank’s continued open market operations and the dollar-rupee swap, systemic liquidity as of March-end was in deficit at Rs 40,000 crore.

The tightness in liquidity was visible in high credit-deposit ratios and elevated corporate bond spreads.  ( Economic Times)

Putting it another way.

What is holding them back is higher interest rate on deposits and competition from the government for small savings.

The RBI is worried about this and reasonably so as it would be more embarrassing if they ignore this rate cut too.

Underlining the importance of transmission of RBI rate cuts by banks to consumers, Governor Shaktikanta Das on Thursday said the central bank may come out with guidelines on the same.

“We hope to come out with guidelines for rate cut transmission by banks,” Das said, interacting with the media after the monetary policy committee (MPC) meet.

 

Comment
There is a fair bit here that will be familiar to students of the development of the credit crunch in the west. I think one of my first posts as Notayesmanseconomics was about the way that official interest-rates had diverged from actual ones. Also we have a banking sector that is troubled. Next we have quick-fire interest-rate cuts following a period when rises were promised. So there are more than a few ticks on the list.
As to money supply growth it is hard to read because of the ongoing effects of the currency demonetisation in late 2016. So I will merely note as a market that broad money growth was 10.4% in February which is pretty much what it was a year ago.

 

Is it to be higher interest-rates from Mark Carney and the Bank of England?

Yesterday saw a swathe of news from the Bank of England and in particular its Governor Mark Carney who gave evidence to the Economic Affairs Committee of the House of Lords. That is the same body I gave evidence too over the Retail Prices Index and inflation measurement more generally. In some ways he was true to form but in more recent terms opened up a new front with this.

*CARNEY: MARKET PATH OF BOE RATES MAY NOT BE HIGH ENOUGH ( @SmithEconomics )

Although @fxmacro struggled to keep the online equivalent of a straight face.

CARNEY: MARKET PATH OF BOE RATES MAY NOT BE HIGH ENOUGH algos buying on this gibberish

If we start with the algorithm buying meme that is because some automated trades operate off headlines. Things have become much more advanced than in the days of what we used to call “Metal Mickey” ( after a children’s TV programme) trading on the LIFFE floor but the essence is the same. In this instance it and other buying saw the UK Pound £ rise by around half a cent.

Actually the UK Pound £ has been rising in 2019 as the effective exchange rate index has risen from 76.25 on January 3rd to more like 80 now meaning using the old Bank of England rule of thumb that monetary conditions have tightened by a bit more than a 0.5% Bank Rate rise. So it is initially curious to say the least to be hinting at interest-rate rises especially if we see the economic news.

Markit business survey

Governor Carney was speaking not long after the Markit Purchasing Manager’s Index or PMI survey for services had been released. This completed the set which told us this.

At 51.4 in February, up from 50.3 in January, the seasonally adjusted All Sector Output Index signalled a marginal expansion of UK private sector output.

So some growth but not much as they indicated here.

“The latest PMI surveys indicate that the UK economy
remained close to stagnation in February, despite a flurry
of activity in many sectors ahead of the UK’s scheduled
departure from the EU. The data suggest the economy is on
course to grow by just 0.1% in the first quarter.”

Putting it another way.

UK PMI charted against Bank of England policy decisions. PMI still deep in dovish territory.

So if we look at the evidence such as we have it the UK economy contracted in December by 0.2% and seems to be now growing at a quarterly rate of 0.1%. Whilst I have my doubts about PMIs ( think July 2016 if nothing else) the Bank of England relies on them. So it is hinting at interest-rate rises when two main signals are much more in line with interest-rate cuts. Of course this was familiar territory in 2016 when the promise of interest-rate rises faster than markets expect ( deja vu alert ) somehow morphed into not only an interest-rate cut but promises of another smaller one ( 0.1% or 0.15%). The former happened but the latter was dropped as it turned out that the Bank of England was reading the wrong set of tea leaves.

Has something changed?

Well definitely maybe as I note this from The Times.

A disorderly no-deal Brexit would be only half as damaging as the Bank of England warned three months ago, Mark Carney has said.

So what is the detail here?

In November the Bank said that after three years the economy would be between 4.75 per cent and 7.75 per cent smaller than under the prime minister’s plan if there was a hard Brexit.

Mr Carney, the Bank’s governor, told peers yesterday that contingency plans put in place would reduce the damage by 2 percentage points in the “disruptive” model or 3.5 percentage points in the worse “disorderly” one. Both scenarios assumed that there would be significant border frictions, a market crash and a sterling collapse on March 29.

So what has changed since November?

Britain has put in place temporary simplified procedures to reduce border checks and the government has secured six EU free-trade agreements worth about 4 per cent of UK trade. “That’s something, it’s not everything,” Mr Carney said. The Bank has also struck financial services deals with the EU. Brussels, too, has taken measures to reduce friction at the borders.

This is a really awkward subject for the Bank of England which keeps finding itself having to upgrade its forecasts for the post-EU leave vote world and now for versions of the world post Brexit. In the latter example I do have some sympathy as its work was more scenario than forecast but it is also true that it could have produced examples of how things might change if deals were struck. Also the way that Governor Carney has presented things has been in line with his own opinion and has led to accusations of being one-sided.

So maybe there is an influence here on his seeming enthusiasm for interest-rate rises although we do of course have the issue that in spite of claiming large amounts of enthusiasm over the past five years or so he has in net terms delivered the grand sum of one 0.25%.

Be Prepared

Much more satisfactory and an example of the Bank of England doing the right thing came from what may seem an arcane announcement.

The transactions will be facilitated by the activation of the standing swap line between the Bank of England and the European Central Bank as part of the existing international network of standing swap lines which provide an important tool for central banks in pursuit of their financial stability objectives.

The first weekly operation will be on 13 March and operations will run until further notice.

Actually the ECB makes it clearer as to what might happen.

Bank of England to obtain euro from the ECB in exchange for pound sterling.

Also as some may miss this then this is also true.

As part of the same agreement, the Eurosystem would stand ready to lend pound sterling to euro area banks, if the need arises.

So these arrangements provide a backstop for “the precious” otherwise known as the banking system. In terms of use it has mostly been European banks activating such lines usually to get US Dollars but there was a phase of requiring Swiss Francs. Also Japanese banks have needed US Dollars from time to time. There is an irony if we look at the present role of Ireland that the particular swap lines we are looking at today were brought in to help the Central Bank of Ireland if it needed UK Pounds.

Putting the wolf in charge of the chicken house

As the Bank of England is potentially the body that is most keen on eliminating cash so it can more easily introduce negative interest-rates today’s news which the media has latched onto is an example of gallows humour.

Sarah John, Chief Cashier, said: “We are committed to cash. Although its use is declining, many people, including vulnerable groups, still prefer to use cash. It is important that everybody has a choice about how they make payments.  The action we are announcing today will help to support cash as a viable means of payment for those who want to use it.”

The Bank is today announcing that it will convene relevant stakeholders to develop a new system for wholesale cash distribution that will support the UK in an environment of declining cash volumes.

Comment

There is a fair bit of uncertainty to say the least about what will happen in the UK as we move into April. Will we Brexit or not and if so in what form? The problem with the forecasts produced by the Bank of England are that many of the variables were unknown and some still are. We are left with the view that under Governor Carney it has been more than happy to push the establishment line which would chop another leg off the independence chair if you can find one. It is simply not its place to be cheered by one side of the debate and attacked by the other.

Moving to more technical issues I welcome the way that the FX swap lines are being made ready. Some of that is just for show as they could have been used anyway but it does no harm to show that you are prepared. As ever it is about the banks but for once the rest of us benefit too.

Lastly let me move onto a subject I spend much time on so will be brief. From the Financial Times.

UK must tackle RPI inflation reform, Mark Carney says

So he has been cracking on with it since 2013 then? Er no. I have been as regular readers will be aware but both the Financial Times and the Bank of England have stood in the way. Added to this is his suggestion that we only need one measure of consumer inflation when the ones for macroeconomics and the cost of living are really rather different due to the way the housing sector can disappear in the former like they are a Klingon battle cruiser in Star Trek.