Yesterday saw the Bank of England plough familiar territory as we note the excerpts below from its meeting minutes.
Regarding Bank Rate, seven members of the Committee (the Governor, Ben Broadbent, Jon Cunliffe, Dave
Ramsden, Andrew Haldane, Silvana Tenreyro and Gertjan Vlieghe) voted in favour of the proposition. Two
members (Ian McCafferty and Michael Saunders) voted against the proposition, preferring to increase Bank
Rate by 25 basis points.
I say familiar territory because with apologies with Carly Rae Jepson Governor Carney has “really really really really” wanted to raise Bank Rate since he told us this back at Mansion House in the summer of 2014 but somehow there has never quite been the time.
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.
Of course when he wanted to cut he did so at the very next meeting in August 2016 but that arrow hit the wrong target so had to be reversed last November leaving us back where we have been for quite some time. If Forward Guidance is the big deal that central bankers tell us perhaps they might one day update us on the costs of misguidance? Also if we jump back to 2014 it is hard not to wonder what the scale of the issue after so many house price friendly policies is now?
The housing market is showing the potential to overheat.
Perhaps we misunderstood all along and he was saying this was a good thing.
Events have brought us to something of what David Bowie would call a space oddity on this front. Not with house prices as if we overlook London they are still rising according to the official measure as we were told only on Tuesday.
Average house prices in the UK have increased by 4.9% in the year to January 2018 (down from 5.0% in December 2017). The annual growth rate has slowed since mid-2016 but has remained broadly around 5% since 2017.
Just for clarity I think that there are problems with that measure especially with new house prices but it is the official number so the Bank of England will love all the wealth effects it continues to give. Of course my argument that this is inflation has had a good week with Chris Giles the economics editor of the Financial Times and Paul Johnson of the Institute of Fiscal Studies both singing along to Kenny Rogers.
You’ve got to know when to hold ’em
Know when to fold ’em
Know when to walk away
And know when to run
But in line with its reply to me that I discussed on Tuesday the Bank of England will no doubt persist with its economic equivalent of phlogiston.
However there is another area where the wealth effects argument is even more troubled as highlight by this from Paul Lewis of BBC Radio 4’s Moneybox.
FTSE100 plunges below the level it reach at the end of 1999 (6930). So the value of the biggest 100 companies on the London Stock Exchange is now lower than it was 18 years 3 months ago. *awaits angry ‘yes buts’ from investment industry!*
The yes buts will now doubt be around the dividend yield which is a bit over 4% for the FTSE 100 but then of course you need to allow for tax and inflation. But if we return to capital gains on a collective basis there have been thin times to say the least. Of course central bankers would point to when the FTSE 100 fell below 4000 in 2009 and for those who bought then fair enough. But for those who have bought and held as the investment advice invariably is then on a collective or index basis we have been singing along to Talking Heads.
We’re on a road to nowhere
Come on inside
Taking that ride to nowhere
We’ll take that ride
For all the rhetoric of the Bank of England it has undertaken another £3.66 billion of Gilt purchases this week. This is part of this
As set out in the Minutes of the MPC’s meeting ending 7 February 2018, the MPC has agreed to make £18.3bn of gilt purchases, financed by central bank reserves, to reinvest the cash flows associated with the maturity on 7 March 2018 of a gilt owned by the Asset Purchase Facility (APF)
That poses a few questions as if we are on the verge of interest-rate increases why bother with this? I started arguing back in City Am in September 2013 that a way forwards would be to let these Gilts mature and run-off. It would be a slow process but we would have made some solid progress by now. Personally I think that the Bank of England has no plan at all for reducing QE and is hoping that the US Federal Reserve will be a form of crash test dummy for it.
The UK Pound £
Regular readers will join me in having a wry smile at this from the Bank of England.
The sterling exchange rate index had risen by over 1% since the February MPC meeting.
For newer readers there is a Bank of England rule of thumb that they seem to have forgotten which states that this is equivalent to a 0.25% rise in Bank Rate. This puts their waffling rather into perspective especially if we take the analysis to a more advanced level than they do. What I mean by this is that the major factor in inflation trends is the rate against the US Dollar as we see that the vast majority of commodity prices are in US Dollars. Here we see that we are around 16 cents higher than a year ago at US $1.41 meaning that there has been an anti inflationary effect.
We are seeing that effect in the producer price data where at the input level it is offsetting the rise in the price of crude oil and this will feed into the other inflation numbers as 2018 develops. Actually the situation here is what used to be considered a “dream ticket” as we have been weaker against the Euro where we see more trade flows and thus can hopefully benefit. On a smaller scale linking to yesterday the same is true against the Yen which with the equity market turmoil has risen and pushed us back to 148 Yen.
The communication of the Bank of England or as it increasingly describes it forward guidance has got itself into quite a mess. For example there is this.
These members noted the widespread
evidence that slack was largely used up
Is this the same slack that Governor Carney told us was used up in June 2014 or a different one? Also if you are going to say this it would help if you had actually raised interest-rates! I am talking in net terms here as last November only corrected the panic cut of August 2016.
All members agreed that any future increases in Bank Rate were likely to be at a gradual pace and to a limited extent.
Also I note that some seem to be taking my view that the MPC are “Carney’s cronies” to the ultimate extreme. From Berenberg Bank in yesterday’s Guardian Business Live
Step one, signal to markets that a hike could come soon. Step two, let a couple of known hawks dissent in a policy vote shortly thereafter. Step three, hike rates.
So Mark Carney allows them to vote that way? “Permission to dissent sir” “Granted Smyth” “Thank you Sir”. It makes you wonder what the point of the other eight MPC members is and of course where this leaves those who continue to argue that the Bank of England is independent except of course to add to the gaiety of the nation.
As a final point I recall my debate on BBC Radio 4 with ex Bank of England staffer Professor ( he was then) Tony Yates in the autumn of 2016. Back then I pointed out the sterling rule above and with the obvious moral hazard of praising myself it worked a treat. Meanwhile Professor Yates was noting all sorts of financial markets except to my mind the relevant one on his way to recommending the Bank of England cut interest-rates again in November 2016. How did they forget something that works so often?