From time to time we have the opportunity to observe the spinning efforts of the house journal of the Bank of England. So without further ado let me hand you over to the Financial Times.
Bank of England ‘paralysed’ on rates by Brexit uncertainty.
The first thought is which way?But then we get filled in.
Turmoil of EU departure constrains policymakers despite tight labour market.
So up it is then, but of course that brings us to territory which is rather well trodden. You see the Bank of England has raised Bank Rate a mere two times in the last eleven years! Thus the concept of it being paralysed by Brexit prospects is a little hard to take. Whereas on the other side of the coin it was able to cut interest-rates from the 5.75% of the summer of 2007 to the emergency rate of 0.5% very quickly including a reduction of 1.5%. That reduction was twice the current Bank Rate and six times the size of the 0.5% rises. Also we note that the panic rate cut of August 2016 not only happened quickly but means that the net interest-rate increase since the comment below has been a mere 0.25%.
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
It could happen sooner than markets currently expect.
That was Governor Mark Carney at Mansion House in June 2014 and we now know that “sooner than markets expect” turned out to be more than four years before Bank Rate rose above the 0.5% it was then. But I do not recall the FT telling us about paralysis then about our “rock star” central banker.
The case for an interest-rate rise
There is one relief as we do not get a mention of the woefully wrong output gap concept. But we do get this.
Unless the UK’s sub-par productivity improves, the BoE has argued, unemployment cannot remain at current lows without wage growth feeding consumer prices. The latest data showed the labour market tightening again with employment at a record high and wage growth back to pre-crisis levels. “If they further home in on labour market trends, it will be a clear steer that they have a bias to tighten,” said David Owen, chief European economist at Jefferies, who thinks market pricing currently underestimates the likelihood of UK interest rates rising.
There are two main issues with the argument presented. The first is the productivity assumption where the Bank of England now assumes it has a cap based on a “speed limit” for the economy of an annual rate of growth of 1.5%. It’s assumptions are more likely to be wrong that right. Next is that wage growth is back to pre-crisis levels which is simply wrong. It is around 1% per annum short in nominal terms and simply nowhere near in real terms.
According to Kallum Pickering at Berenberg the Bank of England has really,really,really,really,really,really ( Carly Rae Jepsen) wanted to raise interest-rates.
“The BoE would be close to the Fed on rate profile if it weren’t for Brexit . . . The Fed wants to pause, but the BoE has gone slower than otherwise,” he said, adding that barring a hard Brexit, the MPC would need to increase rates for a couple of years to catch up.
Sooner of later someone will turn up with the silliest example of all.
Although the BoE maintains it has plenty of firepower to fight any downturn, some outsiders believe one motive to raise interest rates is to gain space to inject stimulus if needed.
A type of Grand Old Duke of York strategy where you march interest-rates to the top of a hill just so that you can march them down again.
The water gets rather choppy as we find a mention of the inflation target.
Similarly, the BoE is likely to cut its near-term forecast for inflation — already close to target, at 2.1 per cent in December, and set to fall further after a drop in energy prices.
If you were serious about raising interest-rates then the period since February 2017 when inflation went over target would be an opportunity to do so except we only got a reversal of the August 2016 mistake and one other. If you go at that pace when inflation is above target it would be really rather odd to do much more when it is trending lower.
The next issue is the economic outlook where we have been recording economic slow downs in both China and Europe. Some of this is related to the automotive sector which has always affected the UK via Jaguar Land Rover and more recently Nissan. On its own that would make this an odd time to raise interest-rates. If we move to the UK outlook then this mornings Markit Purchasing Manager’s Index or PMI tells us this.
January data indicated a renewed loss of momentum for
the UK service sector, with a decline in incoming new work
reported for the first time since July 2016. Subdued demand
conditions meant that business activity was broadly flat
at the start of 2019, while concerns about the economic
outlook weighed more heavily on staff recruitment. Latest
data pointed to an overall reduction in payroll numbers for
the first time in just over six years.
Some care is needed here as the Markit PMI misfired in July 2016 but we need to recall that the Bank of England relied on it. We know this because that October Deputy Governor Broadbent went out of his way to deny it.
All that said, there’s little doubt that the economy has performed better than surveys suggested immediately
after the referendum and, although we aimed off those significantly, somewhat more strongly than our near term forecasts as well.
So in spite of it being an unreliable indicator at times of uncertainty like now I expect the Bank of England to be watching it like a hawk. If so they will be looking at this bit.
Adjusted for seasonal influences, the All Sector Output Index posted 50.3 in January, down from 51.5 in December. The index has posted above the crucial 50.0 no-change mark in each month since August 2016, but the latest reading signalled the slowest pace of expansion over this period and the second-lowest since December 2012.
If accurate that is in Bank Rate cut territory rather than a raise.
There is a fair bit to consider here so let us start with the “paralysis” point and let me use the words of the absent-minded professor Ben Broadbent from October 2016.
Before August, the UK’s official interest rate had been held at ½% for over seven years, the longest period of
unchanged rates since 1950. No-one on the current MPC was on the Committee when rates were previously
changed, in early 2009; indeed there are children now at primary school who weren’t even alive at the time.
Oh well as Fleetwood Mac would put it. Next comes the issue of why the Bank of England is encouraging what is effectively false propaganda about raising interest-rates? Personally I believe it is a type of expectations management as they increasingly fear that they will have to cut them again. So we are being guided towards the view that events are out of their control. This is awkward as we note the scale of their interventions ( for example some £435 billion of QE) and the way that positive news is always presented as being the result of their actions. Yet they also claim when convenient that lower interest-rates are nothing to do with them at all.
As to my view I am still of the view that we need higher interest-rates but that now is not the time. The boat sailed in the period 2014-16 when the rhetoric of Forward Guidance was not matched by any action. It is hard not to have a wry smile at us being guided towards a 7% unemployment rate then 6.5% and so on to the current 4%.