The problems of the boy who keeps crying wolf

Yesterday saw the policy announcement of the Bank of England with quite a few familiar traits on display. However we did see something rather familiar in the press conference from its Governor Mark Carney.

The Committee judges that, given the assumptions underlying its projections, including the closure of drawdown period of the TFS and the recent prudential decisions of the FPC and PRA, some tightening of monetary policy would be required in order to achieve a sustainable
return of inflation to target.

Yes he is giving us Forward Guidance about an interest-rate rise again. In fact there was more of this later.

Specifically, if the economy follows a path broadly consistent with the August central projection, then monetary policy could need to be tightened by a somewhat greater extent over the forecast period than the path implied by the yield curve underlying those projections.

Yep not only is he promising an interest-rate rise but he is suggesting that there will be several of them. Actually that is more hype than substance because you see even if you look out to the ten-year Gilt yield you only get to 1.16% and the five-year is only 0.54% so exceeding that is really rather easy. Also as I have pointed out before Governor Carney covers all the bases by contradicting himself in the same speech.

Any increases in Bank Rate would be expected to be at a gradual pace and to a limited extent

So more suddenly becomes less or something like that.

Just like deja vu all over again

If we follow the advice of Kylie and step back in time to the Mansion House speech of 2014 we heard this from Governor Carney.

This has implications for the timing, pace and degree of Bank Rate increases.

There’s already great speculation about the exact timing of the first rate hike and this decision is becoming more balanced.

It could happen sooner than markets currently expect.

The print on the screen does not convey how this was received as such statements are taken as being from a coded language especially if you add in this bit.

Growth has been much stronger and unemployment has fallen much faster than either we or anyone else expected at last year’s Mansion House dinner.

Markets heard that growth had been better and that the Bank of England was planning a Bank Rate rise in the near future followed by a series of them. Tucked away was something which has become ever more familiar.

 we expect that eventual increases in Bank Rate will be gradual and limited

Although to be fair this bit was kind of right.

The MPC has rightly stressed that the timing of the first Bank Rate increase is less important than the path thereafter

Indeed the first Bank Rate increase was so unimportant it never took place.

Ben Broadbent

he has reinforced the new Forward Guidance this morning. Here is the Financial Times view of what he said on BBC Radio 5 live.

“There may be some possibility for interest rates to go up a little,” said Mr Broadbent.

It sounds as though Deputy Governor Broadbent is hardly convinced. This is in spite of the fact he repeated a line from the Governor that is so extraordinary the press corps should be ashamed they did not challenge it.

adding the economy was now better placed to withstand its first interest rate rise since the financial crisis…….Speaking to BBC radio, Mr Broadbent said the UK was able to handle a rate rise “a little bit” better as the economy is still growing, unemployment is at a more than 40-year low, and wages are forecast to rise.

Sadly for Ben he is acting like the absent-minded professor he so resembles. After all on that score he should have raised interest-rates last summer when growth was a fair bit higher than now.Sadly for Ben he voted to cut them! In addition to this there is a much more fundamental point which is if we are in better shape for rate rises why do we have one which is below the 0.5% that was supposed to be an emergency rate and of course was called the “lower bound” by Governor Carney?

Forecasting failures

These are in addition to the Forward Guidance debacle but if we look at the labour market we see a major cause. Although he tried to cover it in a form of Brexit wrap there was something very familiar yesterday from Governor Carney. From the Guardian.


We are picking up across the country that there is an element of Brexit uncertainty that is affecting wage bargaining.
Some firms, potentially a material number of firms, are less willing to give bigger pay rises given it’s not as clear what their market access will be over the next few years.

Actually the Bank of England has been over optimistic on wages time and time again including before more than a few really believed there would be a Brexit vote. This is linked to its forecasting failures on the quantity labour market numbers. Remember phase one of Forward Guidance where an unemployment rate of 7% was considered significant? That lasted about six months as the rate in a welcome move quickly dropped below it. This meant that the Ivory Tower theorists at the Bank of England immediately plugged this into their creaking antiquated models and decided that wages would rise in response. They didn’t and history since has involved the equivalent of any of us pressing repeat on our MP3 players or I-pods. As we get according to the Four Tops.

It’s the same old song
But with a different meaning

Number Crunching

This was reported across the media with what would have been described in the Yes Minister stories and TV series as the “utmost seriousness”. From the BBC.

It edged this year’s growth forecast down to 1.7% from its previous forecast of 1.9% made in May. It also cut its forecast for 2018 from 1.7% to 1.6%.

Now does anybody actually believe that the Bank of England can forecast GDP growth to 0.1%? For a start GDP in truth cannot be measured to that form of accuracy but an organisation which as I explained earlier has continuously got both wages and unemployment wrong should be near the bottom of the list as something we should rely on.


There is something else to consider about Governor Carney. I have suggested in the past that in the end Bank of England Governors have a sort of fall back position which involves a lower level for the UK Pound £. What happened after his announcements yesterday?

Sterling is now trading at just €1.106, down from €1.20 this morning, as traders respond to the Bank of England’s downgraded forecasts for growth and wages…..The pound has also dropped further against the US dollar to $1.3127, more than a cent below this morning’s eight-month high.

They got a bit excited with the Euro rate which of course had been just below 1.12 and not 1.20 but the principle of a Bank of England talking down the Pound has yet another tick in any measurement column. Somewhere Baron King of Lothbury would no doubt have been heard to chuckle. There is a particular irony in this with Deputy Governor Broadbent telling Radio 5 listeners this earlier.

BoE Broadbent: Faster Inflation Fuelled By Pound Weakness ( h/t @LiveSquawk )

Oh and I did say this was on permanent repeat.

BoE Broadbent: Expects UK Wage Growth To Pick Up In Coming Years ( h/t @LiveSquawk )


Oh and as someone pointed out in yesterdays comments there has been yet another Forward Guidance failure. If you look back to the first quote there is a mention of the TFS which regular readers will recognise as the Term Funding Scheme. Here are the relevant excerpts from the letter from Governor Carney to Chancellor Hammond.

I noted when the TFS was announced that total drawings would be determined by actual usage of the scheme, and could reach £100bn………. Consistent with this, I am requesting that you authorise an increase in the total size of the APF of £15bn to £560bn, in order to accommodate expected usage of the TFS by the end of the drawdown period.

Who could have possibly expected that the banks would want more of a subsidy?! Oh and the disinformation goes on as apparently they need more of it because of a “stronger economy”.

Also this seems to be something of a boys club again as my title suggests. We have had something of what Yes Minister might call a “woman overboard” problem at the Bank of England.





The UK Public Finances are another source of embarrassment for Mark Carney

Today sees the latest data on the UK Public Finances which so far have meandered on in the same not entirely merry way as before the EU leave vote. This is in stark contrast to the modeling provided by HM Treasury.

In the ‘shock scenario’ presented in the short-term analysis, in 2017-18, real GDP would be 2.9% lower than baseline, but potential GDP would have declined by 2.1% compared to the baseline.

Believe it or not this was the more moderate scenario and as we have not entered that fiscal year it could of course happen but so far we have seen nothing like that.Of course we should have done as the UK economy was supposed to immediately shrink by up to 1%. The consequence was that the fiscal or budget deficit would rise by £24 billion in 2017/18 and the more extreme “severe shock” would see it rise by £39 billion.

There is a particularly worrying postscript to this in that it was personally signed off by former Bank of England Deputy Governor Professor Sir Charles Bean who of course made a right charlie of himself. Well he is now at the Office of Budget Responsibility producing more growth and borrowing forecasts. There is a particular irony in the lack of responsibility and indeed the rewards for failure on display here.

The Financial Times brings up forecasts of a dire future almost as quickly as it has to offer mea culpae for the previous ones being wrong.

The EU’s Brexit negotiators expect to spend until Christmas solely discussing Britain’s divorce from the bloc, denying London any trade talks until progress is made on a €60bn exit bill and the rights of expatriate citizens.

The Bank of England

The Governor of the Bank of England Mark Carney is of course familiar with the concept of providing “alternative facts” and he was on that road at this month’s Inflation Report.

First, the Chancellor’s Autumn Statement eased fiscal policy over the coming years. This explains about half of our forecast upgrade.

Actually there was an announced change but of course that relies on you believing the forecasts of George Osborne. For example the UK budget was originally supposed to be in surplus right now which of course faded not to the grey of Visage but remained solidly in red ink. So it was the sort of claimed change which probably ends up at the same destination. The flight boards may say a diversion Helsinki but somehow the flight lands at the original destination Copenhagen. At the time of typing this Andrew Tyrie of the Treasury Select Committee is really skewering the Bank of England Chief Economist Andy Haldane on this subject by pointing out that this stimulus is apparently much more stimulative than others of the same size and asking why?

Of course Governor Carney is on the road to changing the UK public finances for the worse in two respects. As we move forwards the inflation he is so keen on “looking through” will raise the cost of financing index-linked bonds. As these are linked to the Retail Price Index which is rising at an annual rate of 2.6% the bill is on its way. Also part of the “Sledgehammer” of policy action last August was the Term Funding Scheme which has raised the national debt which shows a clear lack of forethought. You need to make your way to Appendix 9 but there it is some £31.37 billion of additional debt so that the Bank of England can subsidise the banks yet again.

Today’s data

We open with the traditional January surplus.

Public sector net borrowing (excluding public sector banks) was in surplus by £9.4 billion in January 2017, a £0.3 billion larger surplus than in January 2016; this is the highest January surplus since 2000.

There was some good news in the receipts column.

Self-assessed Income Tax and Capital Gains Tax receipts increased by £2.0 billion to £19.8 billion in January 2017 compared with January 2016; this is the highest January on record (monthly recording of self-assessed tax receipts began in April 1999).

Of course it should be the best on record as it is inflated by economic growth and of course inflation over time. However the rises in the tax-free Personal Allowance over the past 2 government’s will have dampened this somewhat.

Something familiar

This is the ongoing issue of ch-ch-changes to the methodology stirring up all the grit from the bottom of the pot so that the water goes from clear to murky.

In this month’s bulletin we have introduced a new methodology for the recording of Corporation Tax and Bank Corporation Tax Surcharge receipts.

It is hard not to groan a little although of course it is badged as an improvement.

Previously, we have used cash receipts for these taxes as a proxy for accrued revenue. An improved methodology derives accrued revenue figures by adjusting cash receipts to more accurately reflect the time at which the economic activity relating to the tax receipts took place.

It is in fact a type of seasonal adjustment.

The impact of introducing the new methodology is to distribute the tax revenue more evenly over individual months in the year.

Actually it also makes the amount in recent years higher. Do they not know how much was collected?

A deeper perspective

This is provided by the financial year so far.

Public sector net borrowing (excluding public sector banks) decreased by £13.6 billion to £49.3 billion in the current financial year-to-date (April 2016 to January 2017), compared with the same period in the previous financial year;

This is essentially because of a good performance on the revenue front.

In the current financial year-to-date, central government received £553.7 billion in income; including £416.8 billion in taxes. This was around 5% more than in the previous financial year-to-date.

Also contrary to the hints of a fiscal boost we received last autumn and still be trumpeted by the Bank of England this morning there has been some restraint in public expenditure.

Over the same period, central government spent £581.2 billion; around 2% more than in the previous financial year-to-date.

Care is needed here but this is quite close to the current official inflation measure ( CPI 1.8%), the same as what next month will be the new measure at the top of the release ( CPIH 2%), and below the number used for index-linking for that sector of the UK Gilt market ( RPI 2.6%). Of course much of the period here was  where inflation was lower but its rise may well tighten policy in real terms. This would be consistent with what we are hearing from the NHS and councils although the former always needs more money.

The National Debt

If he was still Chancellor of the Exchequer George Osborne would be shouting this from the rooftops.

Public sector net debt (excluding both public sector banks and Bank of England) was £1,589.2 billion at the end of January 2017, equivalent to 80.5% of gross domestic product (GDP); an increase of £43.6 billion (or a decrease of 0.6 % points as a ratio of GDP) since January 2016.

He was so keen to be able to declare the latter part of that quote but sadly for him he was the past before it arrived. Poor George, although if we look at his fees for speeches maybe not so poor George. The more eagle-eyed amongst you will have spotted the “improvement” which helped.

Public sector net debt (excluding public sector banks) was £1,682.8 billion at the end of January 2017, equivalent to 85.3% of gross domestic product (GDP); an increase of £91.7 billion (or 1.9 % points as a ratio of GDP) since January 2016.

Actually the internationally comparable figure was 87.6% of GDP as of last March.


As ever much is going on. If we start with the Bank of England then it has not so much moved the goalposts as built its Ivory Tower on the wrong pitch. As the Ivory Tower is fixed in the ground then reality has to change so it has spent so much of this morning talking about a theoretical concept called U* unemployment which does some of the trick. They were discomfited trouble when Andrew Tyrie simply asked them when this had happened before? I did not expect Mark Carney to know as of course the UK did not exist before June 2013 but the blank embarrassed faces of the others were a sight to behold. Sadly nobody asked about why so many female members were leaving the Monetary Policy Committee this year?

The public finances continue to improve albeit more slowly than we would have hoped. There are dangers ahead from the cost of index-linked Gilts as inflation continues to rise and the impact of this inflation on the wider economy. But there are other issues as for example an area near to me in Battersea Park often becomes a trailer park in the search for more revenue, although sadly I understand that the benefit goes more to a private company ( Enable ) than the council itself.






Is the Bank of England really giving us Forward Guidance for an interest-rate rise again?

Yesterday saw a potential element of Groundhog Day or perhaps some truth in the words of the great Yogi Berra.

It’s deja vu all over again

Kristin Forbes of the Bank of England gave a speech in Leeds and the crucial sentence is below.

In my view, if the real economy remains solid and the pickup in the nominal data continues, this could soon suggest an increase in Bank Rate.

This of course reminds us of the period where the Bank of England gave us Forward Guidance when it hinted and sometimes strongly hinted at a Bank Rate rise. An example of this was provided by Governor Mark Carney at Mansion House in the summer of 2014.

The MPC’s current guidance makes clear that we will set monetary policy to meet the inflation target while using up that spare capacity. This has implications for the timing, pace and degree of Bank Rate increases. There’s already great speculation about the exact timing of the first rate hike and this decision is becoming more balanced. It could happen sooner than markets currently expect.

That last sentence sent markets into a frenzy as they adjusted to expectations of an interest-rate rise that year. Of course that was misguidance but that did not deter Governor Carney from hammering out the same old song in March 2015.

The Bank expects to return inflation to target within two years and to make limited and gradual increases in Bank Rate over the next three years in order to achieve that in a sustainable manner.

In January of last year he was hinting again albeit in a weaker manner perhaps affected by the accusations that he had been like an “unreliable boyfriend”

That means we’ll do the right thing at the right time on rates……….The journey to monetary policy normalisation is still young.

Actually the journey never started as of course last August the Bank of England folded like a deck chair and not only cut Bank Rate but embarked on more Quantitative Easing including that of Corporate Bonds.

Why does Kristin Forbes think this?

She claims that she expected a stronger economy.

I have consistently voiced concerns about whether the economy would prove stronger than in earlier MPC forecasts – largely due to a scepticism (based on the evidence discussed above) that heightened uncertainty would have as large a drag on growth as predicted in the short-term. But I also could not dismiss the arguments made for why the economy could slow by as much as in the best collective forecast.

Although as you may well have already noted this is classic on the one hand but on the other hand stuff. A bit like at the Inflation Report last week when Governor Carney informed us that interest-rates might go up or down! But in essence the case for an interest-rate rise is based on inflation trends.

On the other side, annual CPI inflation is expected to increase to 2.8% in the second quarter of 2018, and remain elevated so that it still averages 2.5% over 2019. This persistent overshoot of inflation above the 2% target, in and of itself, might provide a basis to tighten monetary policy

She goes further here.

More specifically, in my view, an overshoot of inflation to almost 3% was just tolerable when combined with a substantially larger deterioration in unemployment and demand than expected today.

There is of course a confession there that the Bank of England was wrong about the economic prospects for the UK post the EU leave vote or as some would put it scaremongering. Let us go back to the August 2016 Inflation Report.

The vote to leave the European Union is likely to affect GDP growth through a number of channels…… domestic demand growth is likely to slow over the near term as greater uncertainty and lower confidence drag on activity.

Of course it did not and here is the rub. These forecasting errors caused near panic at the Bank of England and we saw it adopt what it called a “Sledgehammer” of easing. What did our doubting warrior Kristin Forbes actually do?

All members of the Committee agreed that policy stimulus was warranted at this time, and that Bank Rate should be reduced to 0.25% and be supported by a TFS.

As you can see she voted for a Bank Rate cut and the bank subsidy called the Term Funding Scheme or TFS. She did vote against the Corporate Bond QE on her own and with 2 other voted against the extra Gilt purchases. How long did that last? Just over a month as the September 2016 Minutes tell us.

However, given the potential costs to the economy of immediately reversing the programme underway, they would not vote against the continuation of that programme for now. For Kristin Forbes, these arguments also applied to the corporate bond purchase programme.

Simply extraordinary! What was that about folding like a deck chair? It left the Bank of England looking like a bunch of Carney’s cronies at a time when there were genuine doubts. For example I pointed out on here and on the media such as BBC Radio 4’s Moneybox that a powerful stimulus had been applied to the economy from the lower UK Pound. Even worse Kristin herself had given speeches on the impact of changes in the value of the UK Pound on the UK economy.

The impact of exchange rate movements is even greater for the more open United Kingdom. Traded goods and services constitute over 60% of the UK economy. Currency movements directly affect the competitiveness of exports and import-competing domestic firms, and therefore production, employment, and profitability in both of these sectors. About 80% of sales by companies in the FTSE 100 are earned overseas.

So she was aware but did not have the courage of her convictions and beliefs.

Oh and this on forecasting records is woeful.

But I will show you that the Bank of England has actually done quite well

Anybody spot the catch which involves rewriting history?

What is most striking is how well forecasts for the six months after the vote have performed for most real variables – that is – forecasts made before the referendum based on a Remain vote.


I write this today with a tinge of sadness as I have praised the work and intelligence of Kristin Forbes in her time at the Bank of England. However since August she has behaved as if she has forgotten her principles and intellectual ability and if she was a man we would say she lacks cojones. What is the equivalent phrase for a woman?

Even worse the person who wants to give us forward guidance about an interest-rate rise in a speech acted rather differently only last week. From the Bank of England Minutes.

The Committee voted unanimously in favour of all three propositions.

In fact as there was an £11.6 billion Gilt maturity she voted for more QE which if you look at her claimed views is an even worse decision than her folding last September as we now know that the economy did not collapse in the meantime. Accordingly she is giving us forward guidance that looks like a house of cards built on shifting sands.

Even worse I expect this “stimulus” she has voted for to in fact have a contractionary effect on the UK economy. From the Bank of England Agents earlier today.

Indeed, the average pay settlement was expected to ease in 2017 to 2.2% from 2.7% in 2016

As the Bank of England “looks away now” and not only ignores rising inflation but with its policy easing gives it a push then real wages will fall. Thus the same mistake will be made that was made in 2011 where the so-called stimulus turned into a contraction as inflation rose in that instance to ~5%. That is the saddest part which is that a mistake is on its way to being repeated.

Oh and she credited William Phillips ( of the Phillips Curve) with a Nobel prize he never received presumably confusing him with the physicist of the same name. In a sign of low standards that has now been redacted with no acknowledgement.


This has reported troubles today. From MSN news.

A.P. Moller-Maersk A/S halved its dividend Wednesday and reported a massive quarterly net loss as the dire conditions in the shipping industry took a further toll on its business, though it said it expects demand to regain strength this year…….The company’s net loss for the quarter ended Dec. 31 was $2.68 billion, compared with a loss of $2.51 billion a year earlier. Revenue fell 2.6% to $8.89 billion

Why is this a Bank of England issue? Well it has bought the corporate bonds of Maersk ignoring this issue.

The Danish shipping-and-oil conglomerate’s

Imagine having to explain to the UK taxpayer that you have lost their money supporting a Danish company in a policy you enacted after they had voted to break away from some European involvement?


The Forward Misguidance of Mark Carney and the Bank of England continues

Yesterday was a rather extraordinary day at the Bank of England even by its standards. I do not mean in terms of the policy announcements as they were not only unchanged but were always likely to be that way. This is of course because it boxed itself in with its pronouncements of economic doom last summer leading to its Bank Rate cut and extra QE (Quantitative Easing). There was actually a technical announcement on the QE front about another Operation Twist style move.

the Committee agreed to re-invest the £11.6 billion of cash flows associated with the redemption of the January 2017 gilt held by the Asset Purchase Facility

If you think about an economy which the Bank of England now thinks will have 2% economic growth in 2017 and inflation heading above target soon that is simply completely inappropriate and wrong. It is a consequence of its silly “Sledgehammer” rhetoric which Mark Carney plainly feels is too embarrassing to reverse now.

Economic growth forecasts

The Bank of England and Mark Carney seem to be getting worse and worse at this. From yesterday’s MPC (Monetary Policy Committee) Minutes.

The preliminary estimate of GDP growth for 2016 Q4 had been 0.6%, the same rate of growth as had been registered in the previous two quarters, and 0.2 percentage points higher than expected at the time of the November 2016 Inflation Report. This, together with improvements in business survey output and expectations indicators, had led Bank staff to raise their GDP growth nowcast for 2017 Q1 to 0.5%, also 0.2 percentage points higher than in November.

Such things matter when the Forward Guidance had led to policy changes as we saw in August. In fact the situation is ever more woeful than that. Even the Financial Times which of course has lauded Mark Carney as a “rockstar” central banker could not avoid pointing out this reality.

The Bank of England upgraded UK growth forecasts significantly for the second time in six months on Thursday in the latest indication the central bank’s once-dire outlook for the economy after June’s Brexit vote has been proven overly pessimistic.

The bank said it now predicts gross domestic product will grow 2 per cent this year, the same as last year and up from 1.4 per cent forecast in November. Shortly after the referendum, the BoE predicted the economy would expand just 0.8 per cent.

The simple fact is that the UK consumer and if you look into the detail our female consumers behaved like they have in the past and carried on regardless. It is for the Bank of England to explain why it ignored UK economic history. Perhaps the way it is now packed with people I have described as Carney’s cronies?

Was this predictable?

Yes it was as I pointed out back then. From August 3rd last year on the day of ignominy for the Bank of England.

I would vote for unchanged policy as I waited to see how we respond to the lower value of the UK Pound £ which on the old rule of thumb has provided a move equivalent to a 2%  Bank Rate cut.

I repeated this view on BBC Radio Four’s Moneybox on the 17th of September when I debated with ex Bank of England staffer Professor Tony Yates who said “they did pretty much the right thing”. However it was kind yesterday of Mark Carney to confirm that I was indeed right all along.

Third, financial conditions in the UK remain supportive, underpinned by low risk-free rates, the 18% fall in sterling since its November 2015 peak, and lower credit spreads.

Mark Carney tries to take the credit for this

Perhaps the worst part of yesterday’s Inflation Report was the bit where Mark Carney tried to take the credit for the performance of the UK economy.

In part this reflects Bank of England policy actions, which have also helped lower the impact of uncertainty on activity.

He omitted to point out his own doom laden pronouncements which would hardly have helped uncertainty and he had another go at that yesterday.

This stronger projection doesn’t mean the referendum is without consequence………More broadly, the level of GDP is still expected to be 1½% lower in two years’ time than projected in May, despite the substantial easing of monetary, macroprudential and fiscal policies.

If we return to Governor Carney’s claims we see that we had a “bazooka” from a lower pound compared to a “pea shooter” from his Bank Rate cut as I pointed out on Moneybox. Indeed the Governor got himself into something of a mess at the press conference as he tried to take some of the credit for consumer resilience (debt fuelled growth) and then denied that there was much debt fuelled growth! So let us leave him in his own land of confusion.

Ivory Tower alert

We got some of this too as the woeful Bank of England forecasting effort saw this addition.

Specifically, the MPC now judges that the rate of unemployment the economy can achieve while being consistent with sustainable rates of wage growth to be around 4½%, down from around 5% previously.

This was such a hot potato that the subject was handed over to Deputy Governor Ben Broadbent to explain. Ben was obviously uncomfortable as he began speaking behind his hand in the manner of Jose Mourinho. He then tried to tell us he had been right all along which of course begged the question of why there was a change? Anyway we then did get a brief burst of honesty.

Forecasting is a hazardous business

It is for Ben!

Oh and remember when their Forward Guidance was that 7% unemployment was a significant level? Whatever happened to that….


Another problem is brewing here and this is in addition to the fact that it is going “higher and higher”. This from the Bank of England yesterday was simply wrong.

Beyond that, inflation is expected to increase further, peaking around 2.8% at the start of 2018, before falling gradually back to 2.4% in three years’ time.

As I have written many times on here that is too low as I expect it to rise above 3% due to the impact of the lower UK Pound £ and the higher price of crude oil. I recall Kristin Forbes of the Bank of England saying that she thought inflation would be pushed some 1.75% higher but now she seems to have done something of a U-Turn and decided it will be more like 0.75%. As the UK Pound £ has fallen further in the meantime that is quite a big change.


There is one aspect of Bank of England Forward Guidance which has in fact proved correct.

the appropriate level of Bank Rate is likely to be materially below the 5% level set on average by the Committee prior to the financial crisis.

I think we can say 0.25% is materially below 5%. But the rest of it has proven to be woeful. After all Mark Carney’s hints of a Bank Rate rise would fit an economy over 3 years into a growth phase and with inflation set to run above target. But of course all his hints and teases were followed by exactly the reverse or a Bank Rate cut.

As to the inflation forecast well this morning has brought the beginnings of a further critique of that as well. From the BBC.

Npower has announced one of the largest single price rises implemented by a “Big Six” supplier. The company will raise standard tariff electricity prices by 15% from 16 March, and gas prices by 4.8%. A typical dual fuel annual energy bill will rise by an average of 9.8%, or £109.

Also there is the media inspired great lettuce and broccoli crisis of 2017.

Some supermarkets are rationing the amount of iceberg lettuce and broccoli customers can buy – blaming poor growing conditions in southern Europe for a shortage in UK stores.

Tesco is limiting shoppers to three iceberg lettuces, as bad weather in Spain caused “availability issues”.

Morrisons has a limit of two icebergs to stop “bulk buying”, and is limiting broccoli to three heads per visit.

Asda said courgette stocks were still low after a UK shortage last month.

I guess we can expect higher prices here too as we mull whether the weather has ever affected food availability in the past! As a public service announcement there did not appear to be any shortage at Lidl at Clapham Junction yesterday. What will the Bank of England do about rising inflation? Well as you can see it takes a while to say “nothing”

At its February meeting, the MPC unanimously judged that it remained appropriate to seek to return inflation to the target over a somewhat longer period than usual, and that the current stance of monetary policy remained appropriate to balance the demands of the Committee’s remit.

If you are trading the US non-farm payroll numbers today then good luck….




UK Broad Money growth shows that the Bank of England has been wrong again

Today gives us an opportunity to take a look at the data for the UK money supply and look at the trends. Before we do so the subject of economic forecasting has come up and according to the BBC economics editor Kamal Ahmed a person fairly regularly featured on here has given a “withering response” to a suggestion that “economics is in crisis”. Of course the economics in crisis theme was even expressed by the Queen on a visit to the LSE in  November 2008. From the Daily Telegraph.

Prof Garicano said: “She was asking me if these things were so large how come everyone missed it.” He told the Queen: “At every stage, someone was relying on somebody else and everyone thought they were doing the right thing.”

Well that’s all right then apparently. Actually the economics profession did act true to form when 4 years later on a visit to the Bank of England one of its economists offered an answer. However let us return to our individual.

One of Britain’s most highly respected economists has hit back at criticisms of economic forecasts.

When I discovered the identity and that it was Martin Weale I asked by whom he was respected? But let us continue with the piece itself.

They could not be expected to precisely predict the economic future but were based on “sensible inferences from past patterns,” he said.

Briefly I agree with him but there are two major problems here. These forecasts are made several years ahead to an accuracy of 0.1% when in fact they struggle to know whether the numbers are in fact going up or down. The quarter just past was an example of even a short-term forecast being very wrong. Also in an era of considerable change “sensible inferences from past patterns” are in fact not sensible at all. On the way even Martin Weale found himself admitting this.

“People say forecasts all turn out to be wrong,” he said.

“I regard that as a silly comment, forecasting is uncertain, that’s the nature of things, forecasts aren’t wrong or right, they are simply the best you can do.

You may note that the higher you get up the establishment food and pay chain the less responsible you are for anything “forecasts are wrong or right”, and yet those at the lower and middle ends of the scale would find themselves sacked for consistently being wrong.

Martin Weale’s Record

If we look back he was involved in the flawed monthly average earnings series and perhaps it was to him a “sensible inference” to ignore the self-employed. Also he has been an implicit supporter of rental equivalence in CPIH. That’s before we get to his U-Turns as he twice had a series of votes for Bank Rate rises from the Bank of England before changing his mind. In fact on the last occasion he appeared to do so with his tail between his legs. Even the  Financial Times had to put it like this in late July.

Only a week ago, Mr Weale gave a speech urging the BoE to wait “for firmer evidence” before cutting rates or expanding its quantitative easing programme to encourage spending.

So he then did what?

One of the UK’s top monetary policymakers has indicated he has changed his mind after a series of negative business surveys and now favours an immediate stimulus for the UK economy.

You may note how a man with a consistent record of failure is described by the media “top monetary policymaker” and “highly respected”. Is this what they mean by post-truth news? Oh and the basis of his change of mind must have been an unclear signal.

Although you can’t say there’s a clear signal, if you spend all the time waiting for a clear signal, it never comes.”

A concerted plan by the Bank of England

This has happened too often now in a short space of time. The Forward Guidance of not only higher interest-rates but soon of 2013/14 was obviously completely wrong. The initial post-Brexit guidance was wrong too as Kristin Forbes admitted last week. Now things which were issued as guides and people remortgaged on the back of are retrospectively described as subject to uncertainty. I believe that is called re-writing history.

Oh and should Professor Weale have the time from his role as a fellow of the ONS – it is hard not to recall Sir Humphrey Appleby pointing out that people got such roles to help cover up past mistakes- perhaps he is thinking of a way of filling it.

Mr Weale, who sat on the MPC between 2010 and 2016, said the OBR was “rightly” set up to take the politics out of Treasury forecasting and that it had done so successfully.

So in my financial lexicon for these times both “uncertain” and “successfully” are sub-sections of the word wrong.

Broad Money Surges

This is a real problem for Martin Weale and his media spinners. You see whilst Martin was spinning like a top with every business survey that came out the UK Pound had fallen and UK Broad Money growth was pushing higher. We now know that this has continued.

M4ex increased by £11.7 billion in October, compared to the average monthly increase of £14.5 billion over the previous six months. The three-month annualised and twelve-month growth rates were 6.9% and 7.8% respectively.

So we see that the taps are fully open although perhaps not everyone as bank lending dipped which means that the precious banking sector which the Bank of England has supposedly reformed is a barrier again. But as we look through the numbers there are other signs of easy credit.

Consumer credit increased by £1.6 billion in October, broadly in line with the average over the previous six months. The three month annualised and twelve-month growth rates were 10.6% and 10.5% respectively.

Okay but we have been told that Martin ( until July) and his colleagues have been prioritising lending to smaller businesses since the summer of 2013 with the Funding for Lending Scheme. So that must be really through the roof?!

Within this, loans to small and medium-sized enterprises (SMEs) decreased by £0.2 billion, compared to an average monthly increase of £0.3 billion over the previous six months. The twelve-month growth rate was 1.7%.

Er well no but the mortgage lending it is no longer supposed to help still seems to be rumbling on.

Lending secured on dwellings increased by £3.3 billion in October, compared to an average monthly increase of £2.6 billion over the previous six months. The three-month annualised and twelve-month growth rates were 3.0% and 3.1% respectively.


As you can see the “withering” response is from a man who looks set to be wrong yet again. If we step aside from the politics which are around here we see a Bank of England which has eased policy into a currency decline and now sees Broad Money growing quickly. In fact if we only grow by say 1.5% next year as many forecasters have recently upgraded us to then there is quite a road to 7.8% isn’t there? A rule of thumb would be that we might expect inflationary pressure of 6%. A lot of care is needed here because the leads and lags in such calculations can be unpredictable and if the money supply remains firm then growth will likely be higher. This is an area where in the 1980s a lot of mathematical models or what Dr.Weale would call “sensible inferences” blew up and had a HAL-9000 style moment. But there is a link and a causal relationship at play here which will mean that the Bank of England will have plenty of opportunity to mull the word “successfully” as defined above.

There was another sense of establishment entitlement at play when Dr.Weale left the Bank of England as it payed for his leaving do. From the Evening Standard.

The Old Lady of Threadneedle Street spent £3,324 on a retirement reception for the ex-monetary policy committee (MPC) member, who stepped down on August 8.

Dr Weale was also presented with a bound set of speeches covering his tenure, costing the Bank a further £416.

I do not know about you but I have had to pay for mine. Mind you was the bound set of speeches considered a punishment?

Problems are mounting for the Bank of England

We find ourselves in a phase which is proving very difficult for the members of the Bank of England Monetary Policy Committee as well as the Governor Mark Carney. This is on two main fronts. The first is that they eased monetary policy into a sustained fall in the UK Pound £ on the foreign exchanges and the other is the related issue of yet another forecasting failure. Associated with this is the promise to ease policy even further in the future in the face of an expected rise in inflation. From the August meeting minutes.

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 rhetoric back then was of “further action” which seems to have disappeared.

The issue of central banker pay has also been raised by Bloomberg who told us this.

When It Comes to Central-Banker Salaries, It Pays to Be Belgian

It goes on to tell us this.

The central bank governors of Belgium, Italy and Germany make more than the ECB president’s annual 386,000 euros ($409,400), data compiled by Bloomberg show. Belgium’s Jan Smets took the crown with about 480,000 euros, almost six times as much as bottom-of-the-list Vitas Vasiliauskas of Lithuania.

Later on it seemed to occur to them that some earned more than this and this was added.

Bank of England Governor Mark Carney earns 480,000 pounds ($599,000) plus housing benefits

Housing benefits is an interesting euphemism if you look at the accounts of the Bank of England.

Mr Carney receives, as was announced on his appointment, an annual accommodation allowance of £250,000p.a., to reflect the additional cost of living in London rather than in Ottawa.

As that on its own is more than US Federal Reserve Chair Janet Yellen receives in total you think it might have been noted in more detail. Also a report that points out that the also well paid Thomas Jordan of the Swiss National Bank “gets an annual train pass” might note this for Governor Carney.

with membership of the Career Average section of the Bank Pension Fund or 30% of salary in lieu.

As of February he has accrued already a pension of £20,000 per annum indexed to the Retail Price Index at age 65. Not bad as we wonder why the “not a national statistic” RPI as opposed to the officially targeted CPI is used? As it is the only area where I can think of where Forward Guidance has worked perhaps lessons can be learnt here, or perhaps not.

Crystal Balls

This has been a big issue this week as we see forecasts from the OBR ( remember the first rule of OBR Club) and the Institute for Fiscal Studies or IFS. The IFS does much good work but please also recall its head Paul Johnson was responsible for the botched UK Inflation Review and I still remember him leaving his own public meeting early claiming a diary mix-up. How is the Bank of England Crystal Ball doing? From Kristin Forbes on Wednesday.

In fact, average GDP growth over the quarters of heightened uncertainty directly before and after the UK referendum on EU membership has been stronger than for all of 2015. It has even been above what is generally believed to be the UK’s potential growth rate.

Hang on so it cut interest-rates and introduced more QE because we were doing better? Let us look in more detail and the emphasis is mine.

UK economic performance has been solid. Quarterly economic growth has picked up from 0.4% in Q1, to an average of 0.6% for Q2 and Q3. This is well above the consensus expectation by economic forecasters, as well as the MPC forecast…………. In both Q2 and Q3, actual GDP growth was substantially higher than forecast (by 0.4pp).

Do you like the way that being wrong is apparently okay as long as others were? No mention of places like here which were more sanguine or indeed those of you in the comments section who were also more sanguine. If so many economic forecasters get it wrong are we seeing a tyranny of the majority to coin a phrase?

I have praised Kristin as being the brightest member of the Bank of England but this stating of the obvious falls below such standards.

What have we learned? Measuring uncertainty is hard.

Really? But at least she musters a sense of humour.

There is much uncertainty about uncertainty.

However there is one more tale of woe for Bank of England forecasting.

Most business surveys suggest that some companies are already delaying investment, or expect to do so over the next year.

Let us skip to today’s update ( 2nd estimate) on UK GDP.

Gross fixed capital formation (GFCF), in volume terms, was estimated to have increased by 1.1% to £79.0 billion between Quarter 2 (Apr to June) 2016 and Quarter 3 (July to Sept) 2016.

So far up is the new down again.

Rather breathtaking

Earlier this week the Daily Telegraph reported this.

Economists are too detached from the real world and have failed to learn from the financial crisis, insisting on using mathematical models which do not reflect reality, according to the Bank of England’s chief economist Andy Haldane.

So a man who has only ever had one employer which is the Bank of England and accordingly exists in its Threadneedle Street bubble is telling others about the “real world”? Also as he is in effect as Chief Economist responsible for the (failed) mathematical models of the Bank of England and has unleashed a “sledgehammer” of monetary easing in response to what they have told him how does this work exactly? Even worse his models have so far been wrong (again).

Corporate Bond QE

This was always going to be problematic as the UK £ Corporate Bond market is not well-developed. Still Apple may need the money or perhaps not if we look at its cash pile. Still supporting the German car industry via buying the bonds of BMW and Daimler…..


There is a simple issue here which is that the Bank of England made forecasts and acted on them. But where is the accountability if they go wrong? Of course things might deteriorate in 2017 and one clear area is the rise in inflation I expect. The problem here is that the Bank of England is supposed to be targeting inflation rather than looking through another “temporary” rise that it so disastrously did – think real wages – in 2010 and 2011.

Ladies Coats

This is an area I am looking into and have received some fascinating replies about on the Royal Statistics Society website. Why? Well they have no lining this year I am told ( sometimes with emphasis and detail) and this made me wonder how statisticians apply the quality mechanisms we are told about. If I can summarise in one sentence it is this from Jill Leyland.

We urgently need ONS to pick up and extend the research done in 2011/2012.

Yet we quote and analyse inflation and GDP to 0.1%.


Mark Carney is the very model of a modern central banker

Yesterday at 4 pm the Governor of the Bank of England spoke to the nation. I have to confess that before the event I wondered why? He had already made his post Brexit referendum statement where he had performed well and said the right things.  At a time of crisis the central bank should do as he did and confirm it will supply liquidity and continue to perform its duties. It was only yesterday that the issue of bank funding costs was raised in the comments section so this move was sensible.

As a further precaution, reflecting the possibility that heightened uncertainty may last a while longer, today the Bank of England is announcing that it will continue to offer Indexed Long-Term Repo operations on a weekly basis until end-September 2016. This will provide additional flexibility in the Bank’s provision of liquidity insurance over the coming months.

So in looser language it is willing to splash the cash in liquidity terms for three months and this should help to keep the UK financial system from any danger of  freezing up. This adds to the back-stop he put in place with his first speech.

And as a backstop, in order to support market functioning, the Bank of England continues to stand ready to provide more than £250bn of additional funds through its normal facilities.

I also have some sympathy with him on this front.

In Tim Geithner’s famous dictum, “plan beats no plan.”

As currently he is dealing with a UK political establishment which is in flux represented by a combination of hiding,backstabbing, denial and disarray. So far so good for Governor Carney.

The model of a modern central banker

These days they respond to events with ever lower interest-rates and extraordinary monetary policies and we got a hint with a large pointed arrow on it from Governor Carney.

the economic outlook has deteriorated and some monetary policy easing will likely be required over the summer.

This was immediately translated as being a signal for a lower Bank Rate and additional Quantitative Easing to the £375 billion stock that the Bank of England currently holds. Before I say what I think he will do I would like to show the financial market reaction to it.

UK Markets

There were two very strong market moves in response to the speech. The first fits in with one of the themes of this blog which is the worldwide push to lower interest-rates and yields. Mark Carney’s words lit the blue touch-paper as UK Gilt prices rose like a rocket. There are reports that the UK 2 year yield went negative briefly which would be the first sighting of such a thing in the UK I can recall. I wonder if that is a misprint but the surge saw our 10 year Gilt yield fall to 0.8% this morning and the 30 year to 1.7%.

The UK FTSE 100 surged also and ended the day above 6500 where it remains. So it is higher than before the Brexit result due to two main factors. The first is due to the lower UK Pound £ as so many of the companies have foreign earnings. The second is the fall in yields above which make any reliable dividend stream look increasingly attractive. As Governor Carney had met the banks the day before an awkward possible “early wire” perspective is provided as the FTSE 100 rallied over 200 points that day in what was then a surprising move. A little care is needed as outside the top 100 the performance is weaker shown by the fact that the FTSE All Share is up only 1% since the pre Brexit close.

By contrast the move in the UK Pound £ was relatively sedate. Yes it fell but then it rallied again as knee-jerk responses met the view that this was what most people expected him to want to do. So the UK Pound fell by around 1%.

Will this help?

In theory yes but then we hit the issue of the fact that the Japanese and European experience has been patchy at best. Yes the Euro area has been putting in a better performance in 2016 but much of that in my view is due to lower oil prices and inflation leading to higher real wages. However if we return to the central banking play book the higher equity prices will stimulate the economy via wealth effects and the lower bond yields will make more economic activity viable.

If that was a magic wand we would not be where we are would we? Also whilst the central bankers may claim that people can borrow cheaply we cannot be sure that the funds will go to the right places. After all the much trumpeted Funding for Lending Scheme (FLS) which started 4 years ago can be measured by the large number of times official sources use the word “counterfactual” in response to it.

On that subject I expect the FLS to be fired up and boosted again probably sooner rather than later.

Forward Guidance

This is where life gets a lot more awkward for Mark Carney as his Forward Guidance predicted higher interest-rates and the UK moving towards a Bank Rate of 2.5% or so. The road to this was signposted at the Mansion House speech just over 2 years ago.

It could happen sooner than markets currently expect.

That was a clear hint to which financial markets responded. There are costs to that but even if that does not bother you much what about those with mortgages and businesses who locked in borrowings to take advantage of interest-rates which he was telling them were good? Instead they have been left far behind as mortgage rates have plunged.

In reality Forward Guidance Mark 20 is for Bank Rate cuts presumably to 0% which I note is at the time horizon of policy action ( around 2 years) during which no interest -rate rises took place and Mark Carney never even voted for one.


This was another awkward bit for Mark Carney yesterday so let is consider his mission statement.

Promoting the good of the people of the United Kingdom by maintaining monetary and financial stability.

Now let us see how that fits with these words.

Uncertainty over the pace, breadth and scale of these changes could weigh on our economic prospects for some time……economic post-traumatic stress’

You might have thought with his and the Bank of England’s dreadful forecasting record he might have shown some discretion. After all claiming certainty of a sort is what got him into his Forward Guidance mess. Also a central bank should act to reduce issue around uncertainty and not feed it whatever the Governor’s own personal views.


It was hard not to have a wry smile at the Governor of the Bank of England hinting at something that I have predicted for so long which is a Bank Rate cut! Let me be clear that down at these levels such moves have so many unintended consequences they may even be contractionary in my opinion. Also there is the issue that whilst he tried to say he was giving his own opinion Mark Carney was in effect tying the hands of his Monetary Policy Committee colleagues behind their backs.

In my view, and I am not pre-judging the views of the other independent MPC members, the economic outlook has deteriorated and some monetary policy easing will likely be required over the summer.

Yes you were pre-judging them Mark because you had told us this.

As required by our remit, the MPC identified that the most significant risks to its forecast concerned the referendum.15 This was the view of all nine independent members of the MPC.

I would not be pleased if I was one of the other eight. A better approach would have been to call an emergency meeting and actually vote. This way around all we have are more Open Mouth Operations as we wonder how many of them are in fact Carney’s cronies. The more I am officially told that someone is “independent” the more I wonder about the reverse.

As to analysis there was this from Kristin Forbes back in October 2014.

Over periods longer than one quarter, however, a stronger real exchange rate is correlated with a significant fall in total exports……..a 10% appreciation of sterling – holding all else equal – is predicted to cause a 3.1% fall in export volumes over the long term.

In conclusion she told us this.

I discussed how sterling’s strength has created some drag on the trade balance, and thereby aggregate demand, growth, and employment.

Now currently we have pretty much the reverse due to sterling’s fall. I would be thinking of that right now.

Also there is fiscal policy when you can borrow for a long time very cheaply. There are possibilities there which did not exist before. Back on June 10th I discussed the issue here as the perspective on fiscal policy has shifted considerably with Gilt yields where they are. I have sympathy with Governor Carney in the sense that there is no one in authority to discuss this with but going forwards it is an option and of course his promised interest-rate cuts would only really work in say 18 months time so too late for any immediate issues.

But let me leave you with my song for Mark Carney with thanks to the Kinks.

And when he does his little rounds
‘Round the boutiques of London Town
Eagerly pursuing all the latest fads and trends
‘Cause he’s a dedicated follower of fashion

On The Radio

I will be on Share Radio ( which is on UK DAB plus the internet) from 1 pm to 1:30 pm today and it is a sign of the times I was on the Morning Money show as well earlier.