The Bank of England and Mark Carney are in denial mode

One of the features of the Brexit debate has been the role of the Bank of England in it. One thing that a supposedly independent central bank should do is avoid being accused of being on one side or the other of political debates. Also it has presented a view which is supposedly supported by the whole institution when with such a split nation that seems incredibly implausible. Thus the alternative view of independence and the reason for having external members, which is to provide different perspectives and emphasis, looks troubled at best.

On this road we see an organisation where all the Deputy-Governors are alumni of Her Majesty’s Treasury, which raises the issue of establishment capture. Also this from the Bank of England website suggests the use of another form of motivation to capture individuals.

Dr Ben Broadbent became Deputy Governor on 1 July 2014. Prior to that, he was an external member of the Monetary Policy Committee from 1 June 2011.

I am far from alone in thinking that this sets up all the wrong motivations and strengthens the power of the Governor via patronage. As to appointment of the absent-minded professor maybe one day he will demonstrate why unless of course we already know.

For the decade prior to his appointment to the MPC, Dr Broadbent was Senior European Economist at Goldman Sachs,

Mervyn King

There is something of an irony in the way that any sort of flicker of Bank of England comes from the former Governor the now Baron King of Lothbury although Bloomberg describe him without his new title.

Mervyn King, a professor at the New York University Stern School of Business,

If we move to his critique here are the details.

It saddens me to see the Bank of England unnecessarily drawn into this project. The Bank’s latest worst-case scenario shows the cost of leaving without a deal exceeding 10 percent of GDP.

Why is this wrong?

Two factors are responsible for the size of this effect: first, the assertion that productivity will fall because of lower trade; second, the assumption that disruption at borders — queues of lorries and interminable customs checks — will continue year after year. Neither is plausible. On this I concur with Paul Krugman. He’s no friend of Brexit and believes that Britain would be better off inside the EU — but on the claim of lower productivity, he describes the Bank’s estimates as “black box numbers” that are “dubious” and “questionable.” And on the claim of semi-permanent dislocation, he just says, “Really?” I agree: The British civil service may not be perfect, but it surely isn’t as bad as that.

The productivity issue is one that has been addressed at the Treasury Select Committee ( TSC) this morning. As I listened I heard Deputy Governor Broadbent tell us that productivity has been falling which is true but when it came to a rationale for further Brexit driven effects we got only waffle. Actually the Chair of the TSC Nicky Morgan was much more impressive by discussing the oil price shock of the 1970s as opposed to Ben Broadbent’s New Zealand based example from the same decade. Later questions on this subject had both the Governor and Ben Broadbent in retreat on the issue of how useful an example New Zealand will be especially as it coincided with a large oil price shock.

There are different arguments as to how long any Brexit effect would last. However one would expect at least some of the issues to decline and go away.

Bank of England evidence

If we move to this morning;s questions posed to the Bank of England there has been a clear attempt by Governor Carney to cover off the fire he is under with two methodologies.

  1. To say the Treasury Select Committee asked for the production of scenarios.
  2. To present it as a technocratic and scientific process where we were told 160 people were involved and 600, measurements were taken. We were guided towards some elasticities where the range was presented between 0.75 and 0.16 and told that 0.25 had been chosen.

He has a point with the first issue because they did do that when it would have been better to have asked the Office for Budget Responsibility. After all as it has been drawn from the same establishment base it would have been likely to have given similar answers if that was the purpose and kept the Bank of England out of it. The second argument is very weak as anyone familiar with the methodology knows that economic models depend more on the assumptions used than anything else. You do not need to know much about them to realise that they are an art form much more than they are a science. Usually of course a bad art form.

Next up was Deputy Governor Jon Cunliffe who has spent a career at HM Treasury as well as this described from the Bank of England website.

Before joining the Bank, Jon was the UK Permanent Representative to the European Union, effective from 9 January 2012.

When quizzed on this he told us this was in the past but a mere ten minutes later he was boasting about his experience. Sadly the inconsistency remained unchallenged as did his assertion that the higher cost of doing financial services business in Frankfurt as opposed to London was not going to be a major factor.

The issue of making this accessible came up with an MP just asking “I am looking for human speak” which added to a previous request for Governor Carney to talk like a human being rather than like an economist. This did not go especially well and to my mind left the interventions of the absent-minded professor as mostly waffle.

Sadly this from the Governor was not challenged though.

We are delivering price stability

Since inflation has been above its 2% per annum target for 18 months that is open to quite a bit of debate! That is before we get to the deeper issue of a 2% inflation target not being the price stability but is spun as. Also if we reflect that reality then one may be troubled by the next bit.

We will deliver financial stability.

Comment

There is a fair bit to consider here and as ever I do my best to avoid the politics and cover what has been said as accurately as I can as there is no official transcript yet. But let me return to an issue I raised last Thursday about the scenario where the Bank of England raises Bank Rate to 5.5% and other interest-rates go even higher.

BOE informing the masses. Carney tells that its controversial projection of Bank Rate going up to 5.5% on disorderly Brexit is mechanistic – a calculation from “a sum of squared deviations of inflation from target and output from potential.” Capiche? ( @DavidRobinson2k )

Nobody seems to have told the “squared deviations” that we are dealing with people who have consistently ignored deviations in inflation above target. Apparently though this is a complete success.

Carney adds that there was “a simpler, less-successful time”, when the Bank only focused on inflation…and we know how that turned out [it led to the financial crisis!].

That’s why we now have a financial policy committee to guard the economy, and that’s why the banks are ready for Brexit, the governor explains: ( The Guardian )

 

 

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What is going on at the Bank of England these days?

Yesterday saw the publication of Brexit forecasts from HM Treasury and the Bank of England. The former was always going to be politically driven but the Bank of England is supposed to be independent, although these days we have to ask independent of what? There is little sign of that to be seen. Let us take a look at the Bank of England scenarios.

The estimated paths for GDP, CPI inflation and unemployment in the Economic Partnership scenarios are
shown in Charts A, B and C. The range reflects the sensitivity to the key assumptions about the extent to
which trade barriers rise, and how rapidly uncertainty declines. GDP is between 1¼% and 3¾% lower than
the May 2016 trend by end-2023. Relative to the November 2018 Inflation Report projection, by end-2023 it is 1¾% higher in the Close scenario, and ¾% lower in the Less Close scenario.

After singing its own fingers last time around it is calling these scenarios rather than forecasts but pretty much everyone is ignoring that. The problem with this sort of thing is that you end up doing things the other way around. Frankly the answers are decided and then the assumptions are picked to get you there. We do know some things.

Productivity growth has slowed, sterling has depreciated and the increase in inflation has squeezed real incomes.

However really the most certainty we have is about the middle part of a lower UK Pound £ and even there the Bank of England seems to omit its own part ( Bank Rate cut and Sledgehammer QE ) in the fall. That caused the fall in real incomes as we see how policy affected the results.

If we move wider the Bank of England attracted fire from both sides as for example this is from the former Monetary Policy Committee member Andrew Sentance who is a remain supporter.

The reputation of economic forecasts has taken a bad blow today with both UK government and appearing to use forecasts to support political objectives. Let’s debate – which I strongly oppose – rationally without recourse to bogus forecasts.

Why would he think that?

Well take a look at this.

The estimated paths for GDP, CPI inflation and unemployment in the disruptive and disorderly scenarios
are shown in Charts A, B and C. GDP is between 7¾% and 10½% lower than the May 2016 trend by end 2023.
Relative to the November 2018 Inflation Report projection, GDP is between 4¾% and 7¾% lower by
end-2023. This is accompanied by a rise in unemployment to between 5¾% and 7½%. Inflation in these
scenarios then rises to between 4¼% and 6½%.

It is the latter point about inflation and a claimed implication of it I wish to subject to both analysis and number-crunching.

How would the Bank of England respond to higher inflation?

Here is the claimed response.

Monetary policy responds mechanically to balance deviations of inflation from target and output
relative to potential. Bank Rate rises to 5.5%.

Let us see how monetary policy last responded to an expected deviation of inflation above target to back this up.

This package comprises:  a 25 basis point cut in Bank Rate to 0.25%; a new Term Funding Scheme to reinforce the pass-through of the cut in Bank Rate; the purchase of up to £10 billion of UK corporate bonds; and an expansion of the asset purchase scheme for UK government bonds of £60 billion, taking the total stock of these asset purchases to £435 billion.

As you can see the mechanical response seems to be missing! Unless of course you count the mechanical response of the mind of Mark Carney as he panicked thinking the UK was going into recession. The other 8 either panicked too or meekly fell in line. The point is further highlighted if we look at the scenario assumed for the exchange-rate of the UK Pound £.

And as the sterling risk premium increases, sterling falls by 25%, in addition to the 9% it has already fallen
since the May 2016 Inflation Report.

Let us examine the reaction function. Let us say that the £ had fallen by 10% when the Bank of England took action then if it ” responds mechanically” we would expect this time around to see a 0.625% reduction in Bank Rate and some £150 billion of extra QE as well as another Term Funding Scheme bank subsidy of over £300 billion.

Instead we are expected to believe that the Bank of England would raise and not cut interest-rates and would do so by 4.75%! There is also an issue with the timing as the forward guidance of the Bank of England has been for Bank Rate rises for over 4 years now and we have had precisely 0.25% in net terms. So at the current rate of progress the interest-rate increases would be complete somewhere around the turn of the century.

Actually there is more because other interest-rates would go even higher it would appear.

Uncertainty about institutional credibility leads to a pronounced increase in risk premia on sterling
assets, including a 100bps increase in the term premium on gilts.

So an extra 1% on Gilt yields although this is only related to a particular piece of theory as we skip what they would be apart from an implication of maybe 6.5%. A particular catch in that is the current ten-year yield is a mere 1.33% and over the past 24 hours it has been falling adding to the previous falls I have been reporting for a while now. Markets do of course move in the wrong direction at times but Gilt investors seem to be placing their bets on the Gilt market and ignoring the Bank of England scenario.

But wait there is more.

Overall, interest rates on loans to households and businesses rise by 250bps more than Bank Rate.

Can this sort of thing happen? Yes as we saw it in the build up to the credit crunch as UK interest-rates disconnected from Bank Rate by around 2%. Also yesterday we were noting such a thing via the fact that Unicredit of Italy has found itself paying 7.83% on a bond which was yielding only 1% as recently as yesterday. But there are two main problems of which the first occurred on Mark Carney’s watch as we note that they way he “responds mechanically” to such developments is to sing along with MARRS.

Pump up the volume
Pump up the volume
Pump up the volume
Get down

Actually such a response by the Bank of England was typical before the advent of Governor Carney. Recall this?

For instance, during the financial crisis the exchange rate
depreciated around 30% initially but settled to be around 25% below its pre-crisis peak in the following
couple of years.

So in a broad sweep in line with the new worst case scenario especially as we recall that inflation went above 5% on both main measures. So Bank Rate went to 5.5%? Er now it was slashed by over 4% to 0.5% and we saw the advent of QE that eventually rose in that phase to £375 billion.

Comment

The first comment was provided by financial markets as we have already noted the Gilt market rally which was accompanied by the UK Pound £ rallying above US $1.28. The UK FTSE 100 did fall but only by 13 points. If there is anything a Bank of England Governor would hate it is being ignored.

Actually the timing was bad too. For some reason the report was delayed from 7:30 am to 4:30 pm but due to yet another problem it was another ten minutes late. This means that very quickly eyes turned to this by Federal Reserve Chair Jerome Powell.

Stocks ripped higher on Wednesday after Federal Reserve Chairman Jerome Powell said interest rates are close to neutral, a change in tone from remarks the central bank chief made nearly two months ago. ( CNBC )

Roughly that seems to take 0.5% off the expected path of US interest-rates and has led to the US ten-year Treasury Note yield falling back to 3%. Also trying to convince people about higher inflation is not so easy when the oil price ( WTI) falls below US $50.

Me on Core Finance TV

 

 

 

 

 

Decision day and the Inflation Report arrive at the Bank of England

Today brings us to what is called Super Thursday as not only does the Bank of England announce its policy decision but we get the latest Inflation Report. Actually the Bank of England has already voted in a change decided upon by Mark Carney so that the official Minutes can be released with the decision. The problem with that comes from the issue that there is plenty of time for any decision to leak. That is on my mind this morning because markets have seen moves and activity.

Sterling extended its gains on Thursday……….

The pound jumped 0.9 percent to as high as $1.2881  sending the currency to a five-day high.

Against the euro, it rose to 88.155 pence per euro  before settling up half a percent at 88.21 pence. The gains follow a rise for sterling on Wednesday.

Now let me switch to interest-rate markets.

Short Sterling being hit in monster clips this morning 20k plus sells. ( @stewhampton)

For those unaware Short Sterling is the future contract for UK interest-rates and is somewhere where I worked back in the day in its options market. The confusing name comes I guess because they were trying to describe short-term interest-rates for sterling and it all got shortened. Anyway @stewhampton has continued.

Continuation of yesterday’s price action, all sells. Smacks of a surprise BOE vote on the hawkish side to me.

Looking at the actual movements we see that the contract for September 2019 was some 0.05 lower at the worst. For comparison an actual Bank of England move is usually 0.25%.

The Shadow MPC

The Times newspaper runs a Shadow Monetary Policy Committee so let us take a look at what it decided.

Sir John Gieve, Charles Goodhart and Andrew Sentance, all former Bank ratesetters, called on the monetary policy committee to increase rates after the £103 billion of fiscal loosening over six years unveiled in Monday’s budget.

Sir Steve Robson, a former Treasury mandarin, Geoff Dicks, a former member of the Office for Budget Responsibility, and Bronwyn Curtis, a non-executive member of the OBR, agreed. All six also cited the tight labour market, with unemployment at a 43-year low of 4 per cent, and rising wages.

On a personal note it is nice to see that Charles Goodhart is still active as he wrote a fair few of the books I read on UK monetary policy as an undergraduate. Also not many people call for a rise in interest-rates at their own semi-retirement party as Andrew Sentance did on Tuesday!

Before I move on I would also like to note that some seem to be catching up with a suggestion I first made in City-AM a bit over five years ago.

Of those who voted to hold rates, Rupert Pennant-Rea, a former deputy governor at the Bank, said that the MPC should start unwinding the £435 billion quantitative easing programme — signalling a bias on The Times panel for tighter policy.Ms Curtis and Sir Steve also called for QE to be wound down.

Decision Day

These are always rather fraught when there is the remote possibility that something may happen. Back in the day that usually meant an interest-rate change and moves were regularly larger which we returned to for a while with the cuts post credit crunch. These days it can also reflect a change in the rhetoric of the Bank of England as well as its Forward Guidance. That is of course if anyone takes much notice of the Forward Guidance which has been wrong more often than it has been right.

But you can have some humour as this from @RANSquawk shows.

Lloyds on – Prices have reversed from the 1.2660 range lows, back through 1.2850 resistance – This, along with momentum back in bull mode, supports our view for a move back towards the top of the 1.2660-1.3320 range

Yes now it has gone up the only way is up and you can guess which song has been linked to on social media.

Doubts

If we now look at the other side of the coin there have been other factors at play over the past 24 hours. First there was the announcement by Brexit Secretary Dominic Raab of progress followed this morning by this.

The UK has struck a deal with the EU on post-Brexit financial services, according to unconfirmed reports.

The Times newspaper said London had agreed in talks with Brussels to give UK financial services firms continued access to the bloc. ( BBC)

On this road we see reasons to be cheerful for the UK Pound £ and also a possible explanation for the lower short sterling. After all a Brexit deal and a likely stronger Pound £ might mean the Bank of England might raise interest-rates again at some future date. Of course we are building up something of a Fleetwood Mac style chain here as we are relying on the words of journalists about the acts of politicians influencing an unreliable boyfriend. Oh well.

House Prices

Having gone to so much effort to raise house prices for which during the tenure of Governor Carney the only way has indeed been up this will worry the Bank of England.

October saw a slowdown in annual house price growth to
1.6% from 2.0% in September. As a result, annual house
price growth moved below the narrow range of c2-3%
prevailing over the previous 12 months. Prices flat month-on-month after accounting for seasonal effects. ( Nationwide)

Reuters have implictly confirmed my point about Mark Carney’s tenure.

That was the weakest increase since May 2013, before Britain’s housing market started to throw off the after-effects of the global financial crisis.

Manufacturing

There was also a downbeat survey from Markit released at 9:30 am.

The seasonally adjusted IHS Markit/CIPS Purchasing
Managers’ Index® (PMI®) fell to a 27-month low of 51.1,
down from September’s revised reading of 53.6 (originally
published as 53.8).

Of course that 27-month low was when they got things really rather wrong after the EU Leave vote and perhaps most significantly helped trigger a Bank of England rate cut. As to factors here I think it is being driven by the automotive sector and the worries about trade generally. In some ways this measure has in fact been a sort of optimism/pessimism reading on views about Brexit.

One slightly odd feature of the report was this as we recall that a number above 50 is supposed to be an expansion and  after all they do measure down to 0.1.

At current levels, the survey indicates that factory output could contract in the fourth quarter, dropping by 0.2%

 

Comment

As you can see there is much for the Bank of England to consider this morning as they advance from a full English ( Scottish & Welsh versions are available) breakfast to morning coffee and biscuits. After all having voted last night there is not much to do until the press conference at 12:30 and less than half of them have to attend that. But as to a rate rise today I think it is time for some Oasis.

Definitely Maybe

Whilst some might say it is on the cards I think that if we add in the weak monetary data we have been watching in 2018 it would be an odd decision. After all it is promising to raise interest-rates like this.

As little by little we gave you everything you ever dreamed of
Little by little the wheels of your life have slowly fallen off
Little by little you have to give it all in all your life
And all the time I just ask myself why you’re really here?

But of course they have made odd decisions before………

Me on Core Finance TV

 

 

Will UK house prices fall by 35% and is that a good thing?

Yesterday the Governor of the Bank of England attended the UK Cabinet meeting to update them on what the Bank thinks about the potential post Brexit economic situation. Typically the main area focused on has been house prices which of course is revealing in itself. Let us take a look at how this has been reflected in the Bank’s house journal otherwise known as the Financial Times.

Mark Carney, Bank of England governor, has delivered a “chilling” warning to Theresa May’s cabinet that a no-deal Brexit could lead to economic chaos, including a property crash that could see house prices fall by a third.

I pointed out on social media that whilst the journalists at the FT might find such a fall in house prices “chilling” first-time buyers would welcome it. Maybe they might start to find a few places to be affordable. So they might well welcome the fact that the FT then remembered that 35% is more than a third!

Among Mr Carney’s most stunning warnings was that house prices would be 35 per cent lower than would otherwise be the case three years after a disruptive no-deal Brexit — which would assume a breakdown in trading relations with the EU.

If you are wondering what would cause this then it was Governor Carney’s version of the four horsemen of the apocalypse.

The property crash would be driven by rising unemployment, depressed economic growth, higher inflation and higher interest rates, Mr Carney warned.

This is where the water gets very choppy for Governor Carney. This is because he has played that card before, and two of his horsemen went missing. Let me explain by jumping back to May 2016. From the Guardian.

The Bank warned a vote to leave the EU could:

  • Push the pound lower, “perhaps sharply”.
  • Prompt households and businesses to delay spending.
  • Increase unemployment.
  • Hit economic growth.
  • Stoke inflation.

Missing from that list is the higher mortgage rates that he had suggested earlier in 2016. Three of the points came true to some extent as the Pound £ fell and due to it inflation by my calculations rose by 1.25% to 1.5%. This reduced real wages and hit UK economic growth. But unemployment continued to fall and employment rise. Also the delays in spending did not turn up. Or to be more specific whilst there may have been some investment delays, the UK consumer definitely did go on quite a splurge as retail sales boomed.

Where the Governor also hit trouble was on the recession issue. This was partly due to his habit of playing politics where he associated himself with forecasts suggesting there would be one. The actual Bank of England view was careful to use the word “could” but the HM Treasury one was not.

a vote to leave would represent an immediate and profound shock to our economy. That shock would push our economy into a recession and lead to an increase in unemployment of around 500,000, GDP would be 3.6% smaller, average real wages would be lower, inflation higher, sterling weaker, house prices would be hit and public borrowing would rise
compared with a vote to remain.

Partly due to his own obvious personal views Governor Carney got sucked into this. It did not help that the HM Treasury report was signed off by the former Deputy Governor Sir Charlie Bean which gave it a sort of Bank of England gloss and sheen. The May 2016 Inflation Report press conference had question after question on the recession issue which illustrates the perception at the time. Then this was added to in July and August 2016 when the Bank of England and in particular its Chief Economist Andy Haldane again raised the recession issue by telling us the Bank needed a “Sledgehammer” response and then delivering it. Or half delivering it because by the time we got to the second part being due ( November 2016) it was clear that the chief economist had got it wrong. But that phase seemed to be driven by a Bank of England in panic mode looking at a later section of the HM Treasury report.

In this severe scenario, GDP would be 6% smaller, there would be a deeper recession, and the number of people
made unemployed would rise by around 800,000 compared with a vote to remain. The hit to wages, inflation, house prices and borrowing would be larger. There is a credible risk that this more acute scenario could materialise.

Did the Bank of England Sledgehammer stop a recession?

Over the past 2 years this has come up a lot with journalists and ex Bank of England staff suggesting that it did. If so it would have been the fastest real economy response to monetary action in history. That would be odd at a time the ECB was telling us it thought the reaction function had slowed, But anyway rather than me making the case let me hand you over to Mark Carney himself and ony the emphasis is mine.

Monetary policy operates with a lag – long and
variable lag, as you know – and if there is a sharp adjustment in demand, in activity, from whatever event, it will take some time for stimulus, if it’s provided – if it’s appropriate to be provided – for it to course through the economy and offset, to cushion that fall in demand. ( May 2016 Inflation Report press conference)

Although he did later claim to have “saved” 250,000 jobs showing yet again the appropriateness of the word unreliable in his case.

Interest-Rates

This is another awkward area for the Governor as he is back to predicting higher interest-rates. The last time he did that he cut them! Still maybe he has learnt something as his critique of a future cut is a description of what happened after the August 2016  one.

“If you cut rates you would end up with higher inflation.”

Public Finances

Moving away from the Governor to the Chancellor he appears to be unaware that the deficit figures have improved considerably.

Mr Hammond said the Treasury would be constrained in its ability to tackle the crisis by boosting spending, noting the country was still recovering from the aftermath of the 2008 crash and questioning the effectiveness of a fiscal stimulus in one country.

Comment

There is a fair bit to consider here. Let us start with house prices which have proved to be rather resilient in 2017/18, and I mean the dictionary definition of resilient not the way central bankers apply it to banks and growth. I thought we would see the beginnings of some falls but whilst there have been some in London the national picture has instead been one of slowing growth. The ideal scenario in my opinion would be for some gentle falls to deflate the bubble.Some argue that it could be done by them being flat for a while but with wage growth seemingly stuck in the 2% to 3% range that would take too long in my opinion.

But house prices are too high and the Bank of England and the government have conspired and operated to put them there. The use of the word “help” in some of the policies has been especially Orwellian as the result of it is invariably to push house prices even higher and thus even more out of reach. So to them a 35% fall seems dreadful and I can imagine the gloom around the cabinet table as it was announced. The Governor would have been gloomy too as the fall would be slightly larger than the rises his policies have helped to engineer as we mull whether that is why 35% in particular was chosen?

So overall a 35% fall in house prices would bring benefits but it would not be a perfect policy. I have had various replies on social media from people who have recently bought and I have friends in that position. I wish them no ill which is why my preference is for the scenario I have outlined. But the housing market cannot be a one way bet forever .

Also let us take some perspective. You see there is little new in the forecast we have discussed today as it has been the Bank of England no-deal Brexit forecast for some time now. So let me finish on a more optimistic note tucked away in the FT article.

However, he boosted Mrs May’s position when he said that if she struck a Brexit deal based on her much-criticised Chequers exit plan presented to Brussels in July, the economy would outperform current forecasts because it would be better than the bank’s assumed outcome.

A reward for his extra seven months? At that point the Prime Minister might have mused how much nicer he might have been if she had given him an extra year.

 

The UK economy boomed in July

Today brings us a raft of data on the UK economy including something relatively new which is the monthly update or economic growth or GDP (Gross Domestic Product). This is part of the new structure where we get the quarterly numbers a couple of weeks later than we used to, which is a good development in terms of them being based on more hard data. But it is not clear to me that having monthly GDP adds an enormous amount to what we know with the data of it being somewhat erratic and perhaps plain wrong.

Anyway we will be able to compare the number for July with the business surveys we have which in the case of the Markit PMI have told us this.

No change is expected at Threadneedle Street on Thursday when the Bank of England meets to set interest rates. The resilient pace of growth signalled by recent PMI surveys will have come as some relief after the August rate hike, but it seems likely that the Monetary Policy Committee will await further news on the economy amid the intensifying Brexit process before tightening again. Rates could rise sooner than March of next year if clarity on the Brexit deal comes earlier, however this seems an unlikely scenario.

Actually they have omitted to point out that they believe the UK economy will grow by 0.4% in this quarter although the jury is out as to whether that is resilient. Compared to the weak monetary data it is but they are not followers of it. Also is there anyone who believes the Bank of England might raise interest-rates at its policy meeting on Wednesday/Thursday? Frankly the list of people who believe it will raise any time soon might not stretch much beyond Markit.

If we stay with the Bank of England its Governor Mark Carney will have smiled at this from the economics editor of the Financial Times over the weekend.

The gambit worked. Britain soon regained economic stability.

Yes he apparently single-handedly restored the UK economy after the EU Leave vote a view I find simply breath-taking. But wait there was more.

The weeks after the referendum defined the reputation of the Canadian at the helm of the BoE and have now earned him two extra years in the post.

Yet later came rather a list of problems which exemplify the phrase “unreliable boyfriend”.

Too often his predictions have proved false. He promised to serve only five years because there are limits to the time anyone can cope with such a punishing job, but will now stay for seven; he said a Leave vote risked a recession that has not materialised, and wrongly predicted that the first rise in UK interest rates above 0.5 per cent was looking likely at the end of 2014.

A more rational and composed assessment would be that yes he did his job on the day after the EU Leave vote but that there is a much longer list of failures. Also I note that the FT has omitted pumping up house prices as one of his failures. Added to that a failing that he was also criticised for in his time at the Bank of Canada is presented as a strength.

It is rare to find central bankers as willing to take a brave stance on important political questions.

Also it is nice of the FT to admittedly very belatedly confirm my long-standing view on his real objectives.

Having agreed to extend his term at Threadneedle Street, Mr Carney need not worry about the merry-go-round of international top jobs.

Did we miss the news that he had extended his term? If so someone needs to inform the Bank of England website.

Mr Carney has announced that he will serve to 30 June 2019

Good news for the UK economy

This morning has brought some sunshine for the UK economy.

Rolling three-month growth in July 2018 was the highest since August 2017, when it was also 0.6%. This continued a pickup from flat growth seen in April 2018.

As is regularly the case this was driven by the services sector.

with a rolling three-month growth of 0.6% in the services industries resulting in a large positive contribution. Production industries had growth of negative 0.5%, dragging on GDP growth. However, construction had a larger contribution to GDP growth than last month, with a large rolling three-month growth of 3.3%.

The strong construction performance rather nicely coincides with my own measure where I count the cranes along Nine Elms between Battersea Dogs and Cats home and Vauxhall Cross. This has risen to a record of 40 which does not count the 2 just before the Dog’s home nor the 6 the other side of Vauxhall Bridge.

Putting it chronologically this was driven by a strong performance in the month of July.

The month-on-month gross domestic product (GDP) growth rate was 0.3% in May 2018, 0.1% in June and 0.3% in July.

Whilst welcome this to my mind highlights a problem with monthly data. Do we really believe that as a pattern where we have two really good months and a poor one? The problems with highlighting monthly data are shown by an area which is a strength of the UK economy.

Within this industry, architectural and engineering activities was the largest contributor with a monthly growth of 4.4%, although this follows a month-on-month growth rate of negative 2.6% in June.

As you can see the June data was rather poor whereas if we take some perspective we note this.

 This industry has shown substantial growth over the past two years.

There is another area where a local guide is performing well as I note the Movie Makers vans and lorries currently residing in Battersea Park.

motion pictures, which increased by 4.1%, contributing 0.04 percentage points

Let us move on with only one cloud in our sunny skies.

Rolling three-month manufacturing growth to July was negative for the fifth consecutive rolling period at negative 0.1%.

Trade Wars

We advance on this data with some trepidation as it is a perennial problem for the UK.

The total UK trade deficit (goods and services) narrowed £1.4 billion to £3.4 billion in the three months to July 2018. Removing the effect of inflation, the total trade deficit narrowed £2.0 billion to £2.5 billion in the three months to July 2018.

If we look at this in terms of the good, the bad, and the ugly we see the following.

The total UK trade deficit (goods and services) narrowed £13.8 billion to £17.0 billion in the 12 months to July 2018. ………The main driver was the trade in services surplus, which widened £8.4 billion to £117.1 billion in the 12 months to July 2018; services exports rose £10.7 billion compared with £2.3 billion for imports………The goods deficit narrowed £5.4 billion to £134.1 billion in the 12 months to July 2018; exports of goods increased £20.2 billion, while imports of goods rose by a lesser £14.8 billion.

The good is plain to see via the improvements seen but that also illustrates the bad as even with good news we still have a deficit. The ugly part comes in when we note that our deficits have lasted not only for years but also for decades.

Comment

Today has brought good news on the UK economy and we should consider how much it changes our view on economic events. To my mind only a little as at least some of this is if you like a “catch-up” from the weak weather related data seen around the end of the first quarter. The overall view of around 0.4% quarterly growth still holds true as we wait to see what happens to the monetary data. As to the trade figures any improvement is welcome although I have ongoing doubts about their accuracy.

Moving to the Bank of England the GDP data will put a positive gloss on its August Bank Rate rise although of course it is supposed to look forwards and not backwards, as today’s data precedes it. Also I note an example of what the French call plus ça change, plus c’est la même chose. Remember this?

I have therefore decided that pre-release access to ONS statistics will stop with effect from 1 July
2017. ( National Statistician John Pullinger)

Whereas rather than being officially told they are now unofficially told or something like that.

, exceptional pre-release access for the Bank of England has been granted for this release.

Okay why?

would only be considered in exceptional circumstances, where denying such access would significantly impede the taking of action in the public interest.

As the policy meeting is this week I can see no such exceptional circumstances.

The Bank of England Governor should always be appointed for a set term

Yesterday not only brought us news on a long running farce at the Bank of England, it showed us what a difference a week can make. To illustrate the latter point here is @RANSquawk from the 28th of August which as you might imagine immediately set off my official denial klaxon.

UK Treasury denies Carney report

The report was that he would be extending his term as Bank of England Governor for another year. This was a case of potential deja vu because back in October 2016 he wrote this to the Chancellor Phillip Hammond.

I would be honoured to extend my time of service as Governor for an additional year to the end of June 2019. By taking my term in office beyond the expected period of the Article 50 process, this should help contribute to securing an orderly transition to the UK’s new relationship with Europe.

In case you were wondering how his could happen? It all came from the original appointment by George Osborne when he was so desperate to get his man he drove a bus through the formal arrangements.

As you will recall,I was appointed as the next Governor in November 2012 for the statutory eight-year
period of office as set out in the Bank of England Act. At that time,I  clearly signalled my intention to
serve for five years.

So it was possible to extend the term as in fact he had been appointed for eight years,  but had been allowed to say he would only serve five which turned out to be six. News emerged yesterday from the Bank of England in-house magazine otherwise known as the Financial Times that seven is the new six.

Mark Carney is expected to extend his stay as governor of the Bank of England until 2020, after Theresa May backed a plan to maintain stability at the central bank through the turbulence of Brexit. Mr Carney told MPs on Tuesday that he would be willing to stay as governor of the BoE beyond his planned exit at the end of June 2019 to help the Brexit process as well as the transition to a new governor. Mrs May has endorsed the plan, with senior government figures saying Mr Carney would now remain in post until the second half of 2020. The precise departure date is expected to be announced by Philip Hammond, the chancellor, within the next week.

You would have thought that the departure date would have been figured out at the beginning, after all how hard can it be to add one year? But I suppose after doling out an extra year maybe you might dole out an extra month or even week as well! Added to all of this is the begged question if the “personal family considerations” were in fact career plans such as Canadian politics ( blocked by the advance of Trudeau), or moving to the IMF ( blocked by the reappointment of Christine Lagarde)? Should the Governor end up serving until June 2021 that would be perfect timing for the IMF job.

Meanwhile I am grateful to the world of physics for informing us that there are an infinite number of other universes which means that there must be one somewhere where this is true.

One senior government figure: “The PM thinks he has done a good job in difficult circumstances; he is well-respected and has a good international standing.”

It seems the disastrous Bank Rate cut of Sledgehammer QE of August 2016 and the promises of more in November 2016 have been magicked away. The Governor did perform well on the morning after the EU Leave vote when the UK government was absent but  the other side of the ledger is larger. He acquired the moniker of being an unreliable boyfriend when in the early days of his broken promises to raise interest-rates and now he is unreliable about how long he will stay as well.

Perhaps though we are looking at the wrong official measure for “good job in difficult circumstances”, as after all house prices have continued to rise.

The UK economic situation

There was some good news this morning from the Markit business survey or PMI.

At 54.3 in August, up from 53.5 in July, the
seasonally adjusted IHS Markit/CIPS UK Services
PMI® Business Activity Index reached its secondhighest
level since February…….UK service providers experienced a stronger increase in business activity and incoming new
work during August. Improving business conditions
helped to underpin a rebound in employment
growth to its fastest for six months.

So the weaker news from the manufacturing and construction surveys from earlier this week was offset leading to this conclusion.

The survey data indicate that the economy is
on course to expand by 0.4% in the third quarter, a
relatively robust and resilient rate of expansion that
will no doubt draw some sighs of relief at the Bank of
England after the rate hike earlier in the month.

So we continue to bumble along but it is hardly robust. If the Bank of England is relieved then it is because at least someone there realises that there have been better times to raise interest-rates than this August.

Also there was better news this morning from an area which has struggled so far in 2018.

The UK new car market enjoyed a boost in August, as year-on-year demand rose 23.1%, according to the latest figures published today by the Society of Motor Manufacturers and Traders (SMMT). 94,094 new cars were registered in the month

We should not get out the bunting quite yet as the number below indicates but it is nice to have a better month.

In the year to date, the overall market remains down by -4.2%

The driver of the improvement is as follows.

Meanwhile, the UK’s growing range of hybrid, plug-in hybrid and pure electric cars continued to attract buyers, with a record one in 12 people choosing one. Demand surged by a substantial 88.7%, with the sector accounting for 8.0% of the market – its highest ever level.

I find that intriguing as in my locale there is quite a bit of electric car charging infrastructure with 9 points around Battersea Park, and a couple more on Battersea Park Road. But oddly they are so rarely used! So much so that I check each time I go past now. I guess I will have to see when or perhaps if that changes.

Forward Guidance

You might think after his many failures in this area that the Bank of England Chief Economist might avoid such matters, but apparently not.

Also speaking before the MPs, Andy Haldane, the BoE’s chief economist, said it was unlikely the central bank would be able to cut interest rates as it did after the Brexit vote if there was no deal with the EU.  ( Financial Times)

Odd for a man who in July and August 2016 was in a panic-stricken rush to cut interest-rates ignoring the previous warnings from the Bank of England that they would rise in such a scenario.

Comment

The good news is that the UK economy is continuing to grow albeit at no great pace. The not so good news is that whilst I am a big fan of the Clash the Governor of the Bank of England should not be allowed to sing along with one of their biggest hits.

Well, come on and let me know
Should I stay or should I go?

Should I stay or should I go now?
Should I stay or should I go now?

Apart from the organisational shambles and lack of forward planning there is the issue that the Governor could at least appear to be free of political control. Although it is also true that even the most Stepford Wives style supporters of claims that the Bank of England is independent must now surely give up the ghost. Meanwhile the Clash continue to critique the unreliable boyfriend.

If I go, there will be trouble
And if I stay it will be double
So come on and let me know

Meanwhile the point of external members is for them to provide thoughts that could be classified as “outside the box” so that there is an alternative to the Bank of England version of the Stepford Wives style consensus. Sadly the evidence provided by Professor Silvana Tenreyro to Parliament yesterday was not only a failure in this respect it merely reinforced a consensus that continues to deny economic reality.

I therefore supported our collective MPC decision in February to lower our forecast estimate of U* from 4½% to
4¼%………….. I expect the output gap to close over
the next year or so.

The Mark Carney Show has misfired again

Yesterday was something of an epoch-making day for the UK but it also turned into a rather odd one. Also this morning has produced another piece of evidence for my argument that we finally got a rise in official interest-rates above the emergency 0.5% level because the Bank of England finally thought the banks have recovered enough to take it. From the Financial Times.

Royal Bank of Scotland will pay its first dividend since it was bailed out during the financial crisis, marking a major milestone on the bank’s road to recovery and paving the way for a further reduction of the government’s 62.4 per cent stake. The bank will pay an interim dividend of 2p per share after it confirms a final agreement on a recent fine with the US Department of Justice.

So even RBS has made some progress although it remains attracted to disasters like iron filings to a magnet as this seems a clear hint that it managed to be long Italian bonds into the heavy falls.

 RBS blamed “turbulence in European bond markets” for a 20 per cent drop in income at Natwest Markets.

As an aside the Italian bond market is being hit again today with the ten-year yield pushing over 3%.

Returning to the UK we also saw a 9-0 vote for a Bank Rate rise as I predicted in my podcast. This was based on my long-running theme that they are a bunch of “Carney’s Cronies” as five others suddenly changed their mind at the same moment as him, making the most popular phrase “I agree with Mark”. As some are on larger salaries added to by generous pension schemes we could make savings here.

A Space Oddity

This was provided by the currency markets which initially saw the UK Pound £ rally but then it fell back and at the time of writing it has dipped just below US$1.30. The US Dollar has been strong but at 1.122 we have not gained any ground against the Euro either at 145 we lost ground against the Japanese Yen.Why?

At first Governor Carney backed up his interest-rate rise with talk of more as in the press conference he suggested that 3 rises over the next 3 years was his central aim. Of course his aim has hardly been true but this disappeared in something of a puff of smoke when he later pointed out that he could keep interest-rates the same or even cut them. This rather brain-dead moment was reinforced by pointing out that he had cut interest-rates after the EU leave vote. This left listeners and viewers thinking will he cut next March?

Then he told Sky News this.

Mark Carney tells me is prepared to cut interest rates back again depending on how Brexit negotiations go. ( Ed Conway)

This morning he has managed to end up discussing interest-rate cuts with Francine Lacqua of Bloomberg after a brief mention of further rises. Then he added to it with this.

Mark Carney threw himself back into the thick of the Brexit debate on Friday, saying the chance of the U.K. dropping out of the European Union without a deal is “uncomfortably high.”

He also spoke to the Today programme on Radio Four which of course has its own audience troubles and here is the take away of Tom Newton Dunn of The Sun,

Blimey. Carney reveals the BoE recently ran a Brexit no deal exercise that saw property prices plummet by a third, interest rates go up to 4%, unemployment up to 9%, and a full-blown recession.

You can see from that why rather than a rally the UK Pound £ has struggled rather than rallied.  Due to his strong personal views Governor Carney keeps finding himself enmeshed in the Brexit debate which given his views on the subject will always head towards talk of interest-rate cuts. He is of course entitled to his personal views but in his professional life he keeps tripping over his own feet as just after you have raised interest-rates this is not the time for it. He could simply have said that like everyone else he is waiting for developments and will respond if necessary when events change.

Oh and we have heard this sort of thing from Governor Carney before. How did it work out last time?

interest rates go up to 4%

 

Today’s News

This has added to the theme I posited yesterday about the interest-rate increase which can be put most simply as why now?

The latest survey marked two years of sustained
new business growth across the service sector
economy. However, the rate of expansion eased
since June and was softer than seen on average
over this period. ( Markit PMI )

This followed a solid manufacturing report and a strong construction one but of course the services sector is by far the largest. This added to the report from the Euro area.

If the headline index continues to track at its current
level, quarterly GDP growth over the third quarter as
a whole would be little-changed from the softer-than expected expansion of 0.3% signalled by official
Eurostat data for quarter two.

Whilst these surveys are by no mean perfect guides there does seem to be something going on here and as I pointed out yesterday it is consistent with the weaker trajectory for money supply growth.

The UK Pound £

This did get a mention in the Minutes.

The sterling effective exchange rate had depreciated slightly since the Committee’s previous meeting and was down 2.5% relative to the 15-day average incorporated in the May Report.

This is awkward on two fronts. Firstly the fall was at least partly caused by the way Governor Carney and his colleagues clearly hinted at an interest-rate rise back then but then got cold feet in the manner of an unreliable boyfriend. Next comes the realisation that all the furore over a 0.25% interest-rate rise mostly ignores the fact that monetary conditions have eased as the currency fall is equivalent to a ~0.6% cut.

R-Star

This appeared having been newly minted in the Bank of England Ivory Tower. Or at least newly minted in £ terms as the San Francisco Fed put it like this last year.

The “natural” rate of interest, or r-star (r*), is the inflation-adjusted, short-term interest rate that is consistent
with full use of economic resources and steady inflation near the Fed’s target level.

If anyone has a perfect definition of “full use of economic resources” then please send it to every Ivory Tower you can find as they need one. Actually the Bank of England has by its actions suggested it is near to here which is rather awkward when they want to claim it is somewhere above 2%. Actually I see no reason why there is only one and in fact it seems likely to be very unstable but in many ways David Goodman of Bloomberg has nailed it.

They don’t know their r* from their elbow

Comment

This is all something of a dog’s dinner and I mean that in the poetic sense because in reality dog’s in my family  always seem to be fed pretty well. We have monetary policy being delivered by someone who looks as though he does not really believe in it. Even the traditional support from ex Bank of England staff seems to be half-hearted this time around and remember that group usually behave as if The Stepford Wives is not only their favourite film but a role-model.

If this is the best that Mark Carney can do then the extension of his term of tenure by Chancellor Hammond can be summed up by Men At Work.

It’s a mistake, it’s a mistake
It’s a mistake, it’s a mistake