The Bank of England is now re-writing history about UK house prices

Yesterday saw the latest in a series of interviews on the Iain Dale show on LBC Radio by Ian McCafferty of the Bank of England. Actually it was the last by Ian as he is about to depart the Bank of England. Before I start I should point out that we were colleagues back in my time at Baring Securities which feels like a lifetime ago mostly because it is! His main claim to fame was declaring that the German Bundesbank would not do something at a meeting and then the door was opened by someone keen to tell the room some news which I am sure you have already guessed.

Moving forwards in time to yesterday Ian had more than a little trouble with the concept of full employment as he assured listeners that the UK was at full employment at the moment. This was really rather breathtaking as it showed a lack of understanding on two major levels. Firstly if we just stay with the unemployment rate those who read my update yesterday will be aware that Japan has seen an unemployment rate some 2% lower or nearly half ours. An odd thing to miss as our shared history involved specialising in Japanese economics and finance. Also it was a statement that on the face of it made no nod at all to the concept of underemployment where people have some work but not as much as they would like. So in his world both Japan and underemployment seemed not to exist.

Presumably Mr.McCafferty was trying to bolster the case for last week’s interest-rate rise in the UK which of course needs all the bolstering it can get but he ended up being challenged by the host Iain Dale. The response was a shift to claiming we are around the natural or equilibrium rate of unemployment but of course this led to another problem. On this road he ended up pointing out that the Bank of England has had more than a few of these but he did at least avoid a full confession that they started the game by signalling that a 7% unemployment rate was significant but now tell us that the equilibrium rate is 4.25%. Thus the reality is that they have chased the actual unemployment rate like a dog chases it tail although to be fair to dogs they usually tire of the game once the fun stops. Whereas should we live up to the song “Turning Japanese” the Bank of England will have chased the “equilibrium rate of unemployment” from if we are generous 6.5% to 2.5%.

House Prices

As you can imagine this subject came up and it was interesting to hear an explanation of UK house price rises omitting the role of the Bank of England. You might have thought that having gone to the effort of producing the bank subsidy called the Funding for Lending Scheme in the summer of 2012 and then produced research saying it had reduced mortgage rates by up to 2% that you might think it was a factor. This would be reinforced by the fact that it was in 2013 that house prices in the UK began to turn and head higher. There is also the Term Funding Scheme which began in August 2016 which amounted to some £127 billion of cheap liquidity ( 0.25% back then) for the banks which even the casual observer might think was associated with the record low mortgage interest-rates which were then seen.

This seems to be a new phase where the Bank of England sings along with Shaggy “It wasn’t me.” The absent-minded professor Ben Broadbent was on the case on the 23rd of July.

But it should be borne in mind when reading – as one often does – that QE has done little except boosted
prices of assets like shares and houses, or even led to a “boom” or “bubble” in those markets.

The research quoted was from colleagues of his who have voted for this QE and I am sure many of you would love to be judge and jury on your own actions! Later he tells us this about UK house prices.

But the latest figure is barely any higher than it was in the middle of the last decade.

So it is the same as the level that contributed to the crash? Not quite so good and whilst it may not be that much of an issue when your salary plus pension benefits total £356,000 many will note that real wages are 6% below their peak according to the official data.So house prices compared to wages are rather different.

Also there is this issue.

Broadly speaking I don’t think any of these things is true. It’s not new; it’s not exactly printing money; equity
and house prices are in real terms still comfortably below their pre-crisis levels; inequality hasn’t risen – nor,
according to the most detailed analysis available, did easier monetary policy have any net impact on it.

I guess he has never seen that bit in the film The Matrix where the Frenchman describes the role of cause and effect. Also on the subject of inequality I note that FT Alphaville has pointed out this.

In London and the South-East of England, this shift has been profound – real prices are nearly 30 per cent higher in London, and 10 per cent higher in the South-East and East.

Some house owners are indeed more equal than others it would appear. But this brings us back to Ian McCafferty who assured us on LBC that the ratio of house prices in London to the rest of the country “is now re-establishing itself at close to its more normal long-term level” . Is 30% higher the new “close to”?

Inevitably the issue of Brexit came up and sadly our intrepid policymaker seemed to struggle with both numbers and words in this regard. Here is the Reuters view on this.

“We are getting stories on (how) the numbers of French and German and other European bankers that are coming to London have fallen quite sharply over the last couple of years,” McCafferty said in a question-and-answer session on LBC radio.

You might think that he would know the numbers via contacting the banks rather than listening to “stories”. Also he had opened by saying there had been an “exodus” of such bankers which of course evokes the thought “movement of jah people” a la Bob Marley. The response from the host was that the number of bankers in the City had risen which then got the reply that the inflow had slowed which again is somewhat different to the initial claim. As this is an issue that is both polarised and political an independent ( his words not mine) should be ultra careful in this area rather than giving us vague rhetoric which falls apart at any challenge.

Oh and before we move on from housing there was this bit.

a number of those who are renting particularly those who work in the City.

Was he thinking of Governor Carney who of course got a £250,000 annual rent allowance?

Comment

There is much that is familiar here as we note that the Bank of England is looking to re-write history in its favour. There are two initial problems with this and the first is the moral hazard in you and your colleagues judging your own actions. On this road Napoleon could have written a counterfactual account of how his retreat from Moscow was a masterly example of the genre. Also there are clear contradictions in the story of which two are clear. The rise in asset prices seems able to boost the economy on the one hand but to have had no impact on inequality on the other. London house prices can have soared and become completely unaffordable in central London to all but the wealthiest and yet are close to normal long-term trends.

Only last week we were guided towards three interest-rate rises but now there seems only to be two.

Britain is “now at full employment” and so can expect “a couple more small interest rate rises” in the next two to three years to stop the economy from overheating, according to Bank of England policymaker Ian McCafferty. ( Daily Telegraph which failed to spot the full employment issue)

Maybe it is because they are only raising them so they can later cut them.

Higher interest rates will also give the Bank room to cut them once more if the economy hits a troubled spell in the years ahead.

 

Advertisements

What will the Bank of England claim next?

This morning has seen Reuters publish the details of an interview with one of the Bank of England’s policymakers Ian McCafferty. So let us take a look at what he said.

The Bank of England should not delay raising interest rates again, one of its top policymakers said, pointing to the possibility of faster pay rises and the recent strong pick-up in the world economy.

This is already a little awkward for our self-proclaimed inflation warrior. This is because the Bank of England has been forecasting faster pay rises for several years now usually due to output gap theory.

Speaking in his office in the BoE on Monday, adorned with books on the economy and a framed page of The Times newspaper with a headline about inflation, McCafferty said that as well as the boost from the world economy’s strong recovery, he thought there was now no slack left in Britain’s labor market.

The slack issue has been a problem for him and his colleagues for some time as this from a speech of his four years ago illustrates.

That is why, in the second phase of forward guidance that came into effect this month as the unemployment
rate passed 7%, the MPC expanded the range of indicators of labour market slack that we are formally
monitoring.

The first phase of Forward Guidance lasted around 6 months and it is hard not to have a wry smile as we have left both the unemployment level originally indicated and the other measure suggested by Ian well behind.

At present, these indicators suggest that the current level of slack in the economy, as reported in the
February Inflation Report, is in the region of 1-1½% of GDP, suggesting that there remains some room for
demand to recover further without exerting upward pressure on inflation.

Even if we are generous that had gone by the end of the year and yet Bank Rate is where it was then having followed the strategy of the Grand Old Duke of York when it did move. Oh and did I mention problems with forecasting a wages boom?

So the pickup in January settlements reported by a number of data providers certainly suggests that nominal pay is finally on the rise.

That is because it is from 2014 but pretty much same rhetoric has been used by the Bank of England this year. Actually Ian was embarrassingly wrong back then was average earnings fell sharply in that April meaning that the rolling three-month measure was at -0.3% in July.

What is the current wages evidence?

Ian gives us yet another regurgitation of the output gap or slack style analysis that has worked so badly for him over the past four years.

Unemployment at its lowest rate since 1975, skill shortages and signs that employers were resorting to higher wage offers to lure staff from rival firms or stop them from leaving would also create inflation pressure.

The official data does not give much of a backing for this as the three monthly average at 2.8% in January is higher than last year but by 0.6%. Also if you look back then this measure was around 3% in the late spring and summer of 2015 so it is a case of back to the future. If we move to the latest quarterly report of the Agents of the Bank of England we get what sounds like the same old scene.

Growth in total labour costs had remained modest, although average pay settlements this year were a little higher than in 2017 for many contacts (Chart 6). Most settlements were between 2½%–3½%, driven by a combination of improved profitability among exporters, the annual NLW increase and higher consumer price inflation.

As consumer inflation is set to fade there is an issue there and I will leave you to mull how government policy via the National Living Wage can lead to the Bank of England raising Bank Rate! Oh and many would regard exporters raising pay in response to higher profitability as a good thing.

There is more backing for the higher wages in prospect view from private-sector surveys such as this from this morning on Bloomberg.

U.K. firms facing a shortage of workers are pushing up starting salaries, according to IHS Markit and the Recruitment and Employment Confederation.

Pay for temporary or contract staff rose at the quickest pace in six months in March, as the supply of job candidates fell sharply, they said in a report on Tuesday. Vacancies grew across all categories, with engineers and IT workers the most sought after for permanent roles, and hotel and catering employees in highest demand for temporary jobs.

However City-AM has spotted something which Bloomberg seems to have overlooked.

However, signs of increasing pay pressure for staff in permanent roles have diminished since hitting an almost three-year high in January.

A Space Oddity

This is somewhere between confused and simply wrong and the emphasis is mine.

The BoE raised rates for the first time in more than a decade in November, saying that Britain, while growing more slowly than other rich countries because of the impact of the 2016 Brexit vote, was more prone to inflation than in the past.

If we look back to the past we have seen plenty of examples where inflation has been much higher. Ian should know this as I worked with him during one of them. But if we look more recently there are two reasons for using less not more. Firstly there has so far been no sign that the inflation caused by the fall in the UK Pound £ has had secondly and tertiary effects and rolled through the system like it used to. On the evidence so far it hit and then faded. Secondly inflation has not even gone as high as it did in the autumn of 2010.

The World Economy

This is an example of a type of space oddity.

the boost from the world economy’s strong recovery

This is an example of steering monetary policy via the rear window when you are supposed to be looking ahead via the front window. To set monetary policy correctly you would have needed to raise interest-rates around a year before this in fact you could argue somewhere around the time they cut them.

Andy Haldane

There is a clear problem in you being judge and jury on your own actions as Andy as attempted in Melbourne Australia today.

A detailed, disaggregated analysis of household balance sheets suggests the material loosening in UK
monetary policy after the financial crisis did not have significant adverse distributional consequences.

These days it only takes a couple of minutes for him to be challenged about reality which is very different to the lauding he used to get.

 

Personally I am disappointed that having invited Billy Bragg to give a talk at the Bank of England Andy has not produced one of these for him.

Some illustrative and tentative examples of these personal “monetary policy scorecards” have been shown.

Oh and I owe the Bank of England an apology as I though their version of sending Andy to Coventry was complete when they sent him to the Outer Hebrides whereas I now note he is giving speeches in Australia. Will he be the first man on Mars?

Also let me help him out on a subject which he has confessed to not understanding which is pensions. By my calculations his is worth at least £3.4 million will he be producing a personal scorecard?

Comment

There are two fundamental problems here. The first is the error made by the Bank of England back in August 2016 when it confused cut with raise something from which it has never fully recovered. It now has figured out that interest-rates are too low but in terms of timing would be raising in the face of falling inflation and signs of a weakening economic outlook.

Next is the issue of telling everyone it has made them better off. Apart from the obvious moral hazard involved if it was true then why does it need to keep telling us? Moving to a more technical issue it is difficult for a man who does not understand one of the biggest sources of wealth (pensions) to lecture us about it. Sweet summed it up back in the day.

Does anyone know the way, did we hear someone say?
We just haven’t got a clue what to do
Does anyone know the way, there’s got to be a way?
To Block Buster!