Yesterday saw a swathe of news from the Bank of England and in particular its Governor Mark Carney who gave evidence to the Economic Affairs Committee of the House of Lords. That is the same body I gave evidence too over the Retail Prices Index and inflation measurement more generally. In some ways he was true to form but in more recent terms opened up a new front with this.
*CARNEY: MARKET PATH OF BOE RATES MAY NOT BE HIGH ENOUGH ( @SmithEconomics )
Although @fxmacro struggled to keep the online equivalent of a straight face.
CARNEY: MARKET PATH OF BOE RATES MAY NOT BE HIGH ENOUGH algos buying on this gibberish
If we start with the algorithm buying meme that is because some automated trades operate off headlines. Things have become much more advanced than in the days of what we used to call “Metal Mickey” ( after a children’s TV programme) trading on the LIFFE floor but the essence is the same. In this instance it and other buying saw the UK Pound £ rise by around half a cent.
Actually the UK Pound £ has been rising in 2019 as the effective exchange rate index has risen from 76.25 on January 3rd to more like 80 now meaning using the old Bank of England rule of thumb that monetary conditions have tightened by a bit more than a 0.5% Bank Rate rise. So it is initially curious to say the least to be hinting at interest-rate rises especially if we see the economic news.
Markit business survey
Governor Carney was speaking not long after the Markit Purchasing Manager’s Index or PMI survey for services had been released. This completed the set which told us this.
At 51.4 in February, up from 50.3 in January, the seasonally adjusted All Sector Output Index signalled a marginal expansion of UK private sector output.
So some growth but not much as they indicated here.
“The latest PMI surveys indicate that the UK economy
remained close to stagnation in February, despite a flurry
of activity in many sectors ahead of the UK’s scheduled
departure from the EU. The data suggest the economy is on
course to grow by just 0.1% in the first quarter.”
Putting it another way.
UK PMI charted against Bank of England policy decisions. PMI still deep in
#BoE dovish territory.
So if we look at the evidence such as we have it the UK economy contracted in December by 0.2% and seems to be now growing at a quarterly rate of 0.1%. Whilst I have my doubts about PMIs ( think July 2016 if nothing else) the Bank of England relies on them. So it is hinting at interest-rate rises when two main signals are much more in line with interest-rate cuts. Of course this was familiar territory in 2016 when the promise of interest-rate rises faster than markets expect ( deja vu alert ) somehow morphed into not only an interest-rate cut but promises of another smaller one ( 0.1% or 0.15%). The former happened but the latter was dropped as it turned out that the Bank of England was reading the wrong set of tea leaves.
Has something changed?
Well definitely maybe as I note this from The Times.
A disorderly no-deal Brexit would be only half as damaging as the Bank of England warned three months ago, Mark Carney has said.
So what is the detail here?
In November the Bank said that after three years the economy would be between 4.75 per cent and 7.75 per cent smaller than under the prime minister’s plan if there was a hard Brexit.
Mr Carney, the Bank’s governor, told peers yesterday that contingency plans put in place would reduce the damage by 2 percentage points in the “disruptive” model or 3.5 percentage points in the worse “disorderly” one. Both scenarios assumed that there would be significant border frictions, a market crash and a sterling collapse on March 29.
So what has changed since November?
Britain has put in place temporary simplified procedures to reduce border checks and the government has secured six EU free-trade agreements worth about 4 per cent of UK trade. “That’s something, it’s not everything,” Mr Carney said. The Bank has also struck financial services deals with the EU. Brussels, too, has taken measures to reduce friction at the borders.
This is a really awkward subject for the Bank of England which keeps finding itself having to upgrade its forecasts for the post-EU leave vote world and now for versions of the world post Brexit. In the latter example I do have some sympathy as its work was more scenario than forecast but it is also true that it could have produced examples of how things might change if deals were struck. Also the way that Governor Carney has presented things has been in line with his own opinion and has led to accusations of being one-sided.
So maybe there is an influence here on his seeming enthusiasm for interest-rate rises although we do of course have the issue that in spite of claiming large amounts of enthusiasm over the past five years or so he has in net terms delivered the grand sum of one 0.25%.
Much more satisfactory and an example of the Bank of England doing the right thing came from what may seem an arcane announcement.
The transactions will be facilitated by the activation of the standing swap line between the Bank of England and the European Central Bank as part of the existing international network of standing swap lines which provide an important tool for central banks in pursuit of their financial stability objectives.
The first weekly operation will be on 13 March and operations will run until further notice.
Actually the ECB makes it clearer as to what might happen.
Bank of England to obtain euro from the ECB in exchange for pound sterling.
Also as some may miss this then this is also true.
As part of the same agreement, the Eurosystem would stand ready to lend pound sterling to euro area banks, if the need arises.
Putting the wolf in charge of the chicken house
As the Bank of England is potentially the body that is most keen on eliminating cash so it can more easily introduce negative interest-rates today’s news which the media has latched onto is an example of gallows humour.
Sarah John, Chief Cashier, said: “We are committed to cash. Although its use is declining, many people, including vulnerable groups, still prefer to use cash. It is important that everybody has a choice about how they make payments. The action we are announcing today will help to support cash as a viable means of payment for those who want to use it.”
The Bank is today announcing that it will convene relevant stakeholders to develop a new system for wholesale cash distribution that will support the UK in an environment of declining cash volumes.
There is a fair bit of uncertainty to say the least about what will happen in the UK as we move into April. Will we Brexit or not and if so in what form? The problem with the forecasts produced by the Bank of England are that many of the variables were unknown and some still are. We are left with the view that under Governor Carney it has been more than happy to push the establishment line which would chop another leg off the independence chair if you can find one. It is simply not its place to be cheered by one side of the debate and attacked by the other.
Moving to more technical issues I welcome the way that the FX swap lines are being made ready. Some of that is just for show as they could have been used anyway but it does no harm to show that you are prepared. As ever it is about the banks but for once the rest of us benefit too.
Lastly let me move onto a subject I spend much time on so will be brief. From the Financial Times.
UK must tackle RPI inflation reform, Mark Carney says
So he has been cracking on with it since 2013 then? Er no. I have been as regular readers will be aware but both the Financial Times and the Bank of England have stood in the way. Added to this is his suggestion that we only need one measure of consumer inflation when the ones for macroeconomics and the cost of living are really rather different due to the way the housing sector can disappear in the former like they are a Klingon battle cruiser in Star Trek.