Today is a Bank of England day of a different sort and it comes from this spoken by ones of its policymakers Gertjan Vlieghe on the 13th of this month.
Gertjan Vlieghe, an external MPC member, said his view on whether to keep waiting for an economic revival or vote to lower rates from 0.75 per cent to 0.5 per cent would depend on survey data released towards the end of January.
At this time this combined with a speech a day before by Bank of England Governor Mark Carney revved up expectations of a Bank Rate cut next week. What Gertjan was doing was reflecting something of a shift in the reaction function of the Bank of England for which we can look at a speech given by the absent-minded professor Ben Broadbent back in early October 2016.
But human instinct in this area isn’t always so rational. We’re prone to over-interpret noisy events, seeing
structure and determination when, very often, there isn’t any
Indeed as he tries to make the policy error he had just made look reasonable. The link is that the Bank of England panicked in response to the Markit PMIs back then. Not only did it cut it’s official interest-rate to 0.25% and add an extra £60 billion of QE it gave Forward Guidance of a further interest-rate cut to 0.1%. In case you are wondering why 0.1%? That is as low as it thinks it can go ( lower bound) because it is terrified of what a zero interest-rate would do to the creaky IT infrastructure of the UK banking sector.
In another link to the present the absent-minded professor told us this.
It’s also that many economic indicators are in general very noisy, even at the best of times.
Retail sales, for example, are estimated to have fallen by 0.2% between July and August. Is this meaningful?
Not really. The index is extremely volatile – the average monthly change in retail sales volumes is over a
percentage point – and poorly correlated with quarterly GDP, even with consumption growth specifically.
So Deputy-Governor Broadbent would apparently overlook the weak retail sales data the UK saw in December. Indeed relying on PMI data back then got him spinning around more than Kylie Minogue, and the emphasis is mine.
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 nearterm forecasts as well.
That is a laugh out loud moment as we note that they planned to cut interest-rates as much as they could and as another example were so enthusiastic about Corporate Bond QE they had to buy bonds from foreign companies such as Maersk to make up the numbers ( £10 billion).
It just got better as we were advised not to do what Ben and his colleagues just had done.
Why might that be? Well, again, one shouldn’t rush to judgement here.
Let us move on after noting that using the PMI data misled the Bank of England back then and that apparently Ben Broadbent struggles with the past as well as the present and future.
And even after the event, it may not be clear
why a particular out-turn has differed from the central prediction, in one direction or the other.
What were the numbers?
The numbers may well have had Governor Carney spilling his morning espresso ( no milk as it is bad for climate change) in surprise.
January data from the IHS Markit / CIPS Flash UK Composite PMI® highlighted a decisive change of direction for the private sector economy at the start of 2020. Business activity expanded for the first time in five months, driven by the sharpest increase in new work since September 2018.
For these times that is like the “Boom! Boom! Boom!” of the Black-Eyed Peas. Or as you can see below what may well be a Boris Bounce.
The latest reading was the highest for almost one-and-a-half years and signalled a moderate expansion of business activity across the UK private sector economy. There were widespread reports that reduced political uncertainty following the general election had a positive impact on business and consumer spending decisions at the start of the year.
Looking into the detail we see first something familiar which is service sector strength and something welcome which is an improvement in the manufacturing sector.
Service providers experienced solid increases in business
activity and incoming new work in January. Meanwhile,
the performance of the manufacturing sector stabilised in
comparison to the end of 2019, but still trailed behind the
service economy amid ongoing weakness in export markets.
This was backed up by a suggestion that the positive labour market data we looked at on Tuesday may well be continuing.
Employment numbers increased for the second month running in January, with marginal growth seen in both the manufacturing and service sectors. Additional staff hiring was supported by a sustained rebound in output growth projections for the next 12 months, with business optimism reaching its highest level since June 2015.
The latter bit seems especially hopeful but of course may turn out to be Hopium.
Maybe manufacturing has returned to stagnation which is far from ideal but much better than where we were.
Manufacturing production meanwhile fell at a much slower
pace than in December, with the latest reduction only marginal and the smallest since the current phase of decline began in June 2019.
Putting it all together we are told this.
“The survey is indicative of GDP rising at a quarterly rate of approximately 0.2% in January, representing a welcome
revival of growth after the malaise seen in the closing months of 2019. Hiring has also picked up.”
The situation is now not a little confused. The Bank of England has gone out of its way to warm financial markets up for an interest-rate cut leading to speculation about next week. For example the benchmark ten-year Gilt yield which as recently as the 10th of this month was 0.8% is now 0.59%. This new trend has had real world effects as Henry Pryor pointed out earlier.
A 95% LTV two-year fix at 2.77% and a 90% LTV five-year fix at 2.33% are currently the lowest available on the market. @Yorkshire_BS launches record-low first-time buyer rates.
Yet we have seen the UK economic data show signs of improvement as for example this week both the labour market numbers and the tax receipt data for December suggested this. Against that was the weak retail sales number for December but as I pointed out earlier the Bank of England has previously stated it is an erratic indicator.
So we are left with the PMI business survey which has come in a fair bit stronger both in absolute and relative terms. As it happens we are now doing around 2 points better than my subject of yesterday the Euro area and according to the PMI have some growth. This has caught expectations on the hop and left a Bank of England which has guided us to it in a pickle because I believe they have wanted to cut interest-rates for a while. It seems the UK Gilt market thinks so too because nearly 2 hours have passed since the PMI number and it has not fallen as you might expect.
There are two undercuts to this. Firstly I would not base a policy decision on a PMI business survey. They have been rather unreliable for the UK as the summer of 2016 showed and also as one is supposed to be looking up to two years ahead then January 2020 matters but not that much. Next comes the issue that an interest-rate cut from 0.75% to 0.5% will do little good in my opinion and may even make things worse. After all we have had lots of interest-rate cuts but looking at where we are suggests they have not achieved much.