The Bank of England has forgotten the economic power of the Pound

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.

Wealth Effects

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

Quantitative Easing

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?





The Bank of England may consider yet more easing going forwards

Today the Bank of England announces its policy decision although care is needed because it actually voted yesterday. This was one of the “improvements” announced a while ago by Governor Mark Carney and it is something I have criticised. My views have only been strengthened by this development. From the Financial Times today.

Andrew Tyrie wrote to the Financial Conduct Authority on Wednesday to ask the regulator to scrutinise unusual patterns of trading behaviour ahead of market-moving data releases. “It would be appalling, were people found to be exploiting privileged pre-release access to ONS data for financial benefit,” said Andrew Tyrie, the chairman of the select committee, referring to the Office for National Statistics. “The FCA is responsible for market integrity. So I have written to them today to ask them to get to the bottom of this.”

Whilst this is not directly related to the Bank of England the UK ship of state looks increasingly to be a leaky vessel. As ever Yes Prime Minister was on the case 30 years ago.

James Hacker: I occasionally have confidential press briefings, but I have never leaked.
Bernard Woolley: Oh, that’s another of those irregular verbs, isn’t it? I give confidential press briefings; you leak; he’s been charged under Section 2a of the Official Secrets Act.

These are important matters where things should be above reproach. Speaking of that it is another clear error of judgement by Governor Carney to allow Charlotte Hogg to vote on UK monetary policy this week. The official releases about her resignation have skirted over the fact that she demonstrated a disturbing lack of knowledge about monetary policy when quizzed by the Treasury Select Committee leading to the thought that her actual qualification was to say ” I agree with Mark”.

Other central banks

The Swiss National Bank has joined the groupthink parade ( if you recall something Charlotte Hogg denied existed) this morning. Whilst busy threatening even more foreign exchange intervention and keeping its main interest-rate at 0.75% it confessed to this.

economic growth in the UK was once again surprisingly strong.

US Federal Reserve and GDP

There was something to shake the Ivory Towers to their foundations in the comments of US Federal Reserve Chair Janet Yellen yesterday evening. From the Wall Street Journal.

The Atlanta Fed’s GDPNow model today lowered its forecast for first-quarter GDP growth to a 0.9% pace. But Ms. Yellen shrugged off signs of weakness in the gauge of overall U.S. economic activity.


“GDP is a pretty noisy indicator,” she said, and officials haven’t changed their view of the outlook. The Fed expects continued improvement in the labor market and broader economy, though she also cautioned that policy isn’t set in stone.

Central banks have adjusted policy time and time again in response to GDP data and for quite some time Bank of England moves looked like they were predicated on it. Now it is apparently “noisy” which provides quite a critique of past policy. Also what must she think of durable goods and retail sales numbers?! Also this is like putting the one ring in the fires of Mordor to the Ivory Towers who support nominal GDP targeting. Oh and as we have observed more than a few times in the past the first quarter number for US GDP has been consistently weak for a while now leading to the issue of “seasonal adjustment squared”.

Things to make Mark Carney smile

Central bankers love high asset prices so let us take a look. From the BBC.

The UK’s FTSE 100 share index has broken through 7,400 points to hit a record intra-day high. The blue chip index is currently trading at 7,421 points.

The official data on house prices is a little behind but will raise a particular smile as of course it helps the mortgage books of the banks.

Average house prices in the UK have increased by 7.2% in the year to December 2016 (up from 6.1% in the year to November 2016), continuing the strong growth seen since the end of 2013.

Maybe even a buyer or two in central London.

Just faced a sealed bid stuation for a client buying a house in Knightsbridge. Life in the London property market is back. ( @joeccles )

Also with the ten-year Gilt yield at 1.22% then UK bonds are at an extremely high level in price terms albeit not as high as when Mark surged into the market last summer.

Maybe even the Bank of England’s investments in the corporate bonds of the Danish shipping company Maersk can be claimed to be having a beneficial effect.

Maersk Oil has managed to cut operating expenditure by about 40% in the last two years, and analysts at Wood Mackenzie predict the company will be the third biggest investor in the UK continental shelf (UKCS) by 2020. (h/t @chigrl )

Although Maersk put it down to a change in taxation policy and there is little benefit now for the UK from this bit.

He was speaking to Energy Voice at the yard in Singapore where the floating storage and offloading (FSO) unit for the £3.3billion North Sea Culzean project is being built.

In terms of good economic news there was this announcement today. From the BBC.

Toyota is to invest £240m in upgrading its UK factory that makes the Auris and Avensis models.

The Japanese carmaker’s investment in the Burnaston plant near Derby will allow production of vehicles using its new global manufacturing system.

Things to make the Bank of England frown

Ordinarily one might expect to be discussing the way that UK inflation will go above target this year and maybe even next week. But we know that the majority of the Monetary Policy Committee plan to “look through” this and thus will only pay lip service to it. However yesterday’s news will give them pause.

If we look into the single month detail it is worrying as you see December was 1.9% and January 1.7% giving a clear downwards trend. If we look further we see that those months saw much lower bonus payments than a year before and in fact falls as for example -3.9% and -2.7% was reported respectively. Putting it another way UK average earnings reached £509 in November but were £507 in both December and January.

They will now be worried about wages growth and should this continue much of the MPC will concentrate on this.


Today seems to be set to be an “I agree with Mark” fest unless Kristin Forbes feels like a bit of rebellion before she departs the Bank of England in the summer. However should there be any other signs of weakness in the UK economy then we will see some of the MPC shift towards more easing I think in spite of the inflation trajectory. That means that it will be out of sync with the US Federal Reserve and the People’s Bank of China ( which raised some interest-rates by either 0.1% or 0.2% this morning).

It may cheer this as an example of strength for the UK property market and indeed banks. From the Financial Times.

BNP Paribas is in talks to acquire Strutt & Parker, the UK estate agents, in what would be a Brexit-defying vote of confidence in the British property market by France’s biggest bank.

Can anybody recall what happened last time banks piled into UK estate-agents?


On Monday I suggested that we would see more Operation Twist style QE from the Bank of England today. Apologies but I misread the list and that will not be so. Off to the opticians for me.

How will the current financial market turmoil affect the UK economy?

At the moment all eyes are on China as it faces yet more stock market turmoil. My subject of Friday looked into the chaos theory view of the impact of a butterfly fluttering its wings and this morning they have certainly fluttered with the Shanghai Composite falling some 8.7% to 3211. Markets across the Pacific too fell and the Abenomics policy of Japan will not be pleased to see the Nikkei 225 equity index falling 895 points to 18540 as part of it is based on the wealth effects of higher equity prices. Also of course the Bank of Japan has been buying Japanese shares via ETFs (Exchange Traded Funds). My theme of today is to look at the impact on the UK and to have as a sub-plot the impact of falling equity markets on economies and in this case sharply falling ones. This is of course the reverse of modern central banking theory as it is an antithesis of QE (Quantitative Easing) policies being deployed by many central banks around the world which are relying on higher asset prices.

Up Up and Away

Whilst it is in some ways reassuring to be reminded that in Star Wars terms there is indeed a place which is “far,far,away” maybe the UK CBI (Confederation of British Industry) shouldn’t be living there!

The UK’s leading business group is forecasting 2.6% GDP growth for 2015, up from 2.4% in June, and 2.8% in 2016, up from 2.5%.

An interesting time to release that you might reasonably think and also there is the issue of them feeling they can forecast the UK GDP to an accuracy of 0.1%. If only! But let us examine what underlies their positive view of the UK economy.

The upgrade is due to a combination of factors, including signs of recovering productivity in the first half of this year feeding through to stronger wage growth. Combined with continued low inflation from falling commodity prices, this gives a welcome boost to household spending.

Okay so far so reasonable what else?

Furthermore, business investment is also likely to remain healthy, with our surveys indicating robust plans for capital spending.

At this point Goldilocks porridge is looking “just right” as consumption and investment expand together although to be perfect we would hope for more exports.

net trade looks set to drag on GDP growth in both 2015 and 2016.

The underlying message here should be played with the Outhere Brothers on the CBI tannoy.

I say, boom boom boom now let me hear you say wayoh

Or to be more specific.

As a result, we expect decent quarterly GDP growth ahead: we anticipate growth to average 0.7% a quarter until the end of 2016, in line with the expansion seen in Q2 2015.

So we move on from a universe where all is happy and bright and rather than continually promising to raise interest-rates the Bank of England has already done so!

UK Retail Sales

Last week’s data reminded us of this.

Year-on-year estimates of the quantity bought in the retail industry grew for the 28th consecutive month in July 2015, increasing by 4.2% compared with July 2014.

And also the reason why it has happened.

Average store prices (including petrol stations) fell by 3.0% in July 2015 compared with July 2014; the 13th consecutive month of year-on-year price falls. All store types except textile, clothing and footwear stores reported decreases.

So the growth is being driven by lower prices and backs up the CBI argument above. Indeed with the price of a barrel of Brent Crude Oil falling towards US $44 this morning we can expect more of it should it remain at such levels. Regular readers will be aware that I was making this point when the headlines were screaming “deflation” as a bad thing. From January 29th.

However if we look at the retail-sectors in the UK,Spain and Ireland we see that price falls are so far being accompanied by volume gains and as it happens by strong volume gains. This could not contradict conventional economic theory much more clearly.

UK House Prices

If we think of one UK asset price falling then minds naturally turn to wonder what UK house prices will do next. A troubling view which brings many themes of this blog together has been suggested by the Financial Times today.

Companies that bought properties after the credit crunch that ended in 2009 have cashed in £3.4bn of London property — pocketing £870m in profits — in the past two years, according to analysis by property advisers Cushman & Wakefield.

Also the numbers show an extraordinary volume level.

Total investment volumes in the central London market hit a record £24.6bn last year, Cushman & Wakefield’s figures show — topping previous record deal volumes in 2013.

So we are left wondering if the smart money has now been and gone to some extent and also if the newer investors or ones with short time spans meaning that the situation just got more precarious. That is an issue in itself but is also one which may topple over into a least part of the residential housing market.

Nine Elms, is seeing a wave of “flat-flipping” as investors try to sell unbuilt properties amid fears the capital faces a glut of expensive homes.

Oh dear so much for the property boom just up the road from me! I do hope we still get the Tube link it has been promised for the 20 years I have lived there. I also note a comment which provides some perspective from an FT article from 6 months ago.

“About 54,000 homes are either planned or already under construction in the priciest areas of the capital…”

“Most of these homes will be priced at close to or above £1m. However, just 3,900 homes worth more than £1m were sold in these areas in 2014…”

So if the current turmoil continues it will not be only equity prices which are falling in London. Can a bubble burst safely?

Currency Wars

Much is happening here as we see some currencies devalue and depreciate as others rise. I note that Canadian investors have been buying London commercial property and for them the rise of the UK Pound £ versus the Loonie will be welcome and last week there was the devaluation from Kazakhstan added to today by the UK Pound now buying 109 Roubles.

However on the other side of the coin the Euro has strengthened again in a move one might not have expected in the midst of the ECB’s continuing QE program. At nearly 1.15 versus the US Dollar it has pushed us below 1.37.


Back in July 2012 the Bank of England told us this.

In fact, the Bank’s assessment is that asset purchases have pushed up the price of equities by at least as much as they have pushed up the price of gilts.

Which in its view contributed to this.

it is important to remember that without the Bank’s asset purchases, most people in the United Kingdom would have been worse off. Economic growth would have been lower. Unemployment would have been higher. More companies would have gone out of business.

They estimated that the wealth gain could have been £600 billion or £10,000 each if distributed evenly. Of course the distribution is far from even as the concept of the 0.1% demonstrates. The Bank of England then somewhat contradicted its hype by started the Funding for Lending Scheme to subsidise banks via pumping up house prices as a result of lower mortgage rates.

So we see that the Bank of England was not as convinced of the beneficial wealth effects from a rising equity market as it claimed as otherwise it would not have started FLS. With the FTSE 100 at 6050 some of the beneficial effects have gone and that is before we consider what may have happened to margin traders on the drop. Also there is the fact that falls like this have a different impact to a sustained rise as China is about to find out.

However the real driver for the UK economy in an asset price sense is the housing market and house prices. If we move from what the Bank of England says to what it did (FLS) we know that it agrees. So if the UK economy is to be affected we need not only to look at other economies such as China but also keep a close eye on the property market.