Get ready for negative interest-rates in the UK

There is a saying that a week is a long time in politics well it appears that this is also true in monetary policy especially for Martin Weale of the Bank of England. We do not need the TARDIS of Dr.Who to skip back to the 18th of July when he told us this.

This uncertainty points to the argument that we should wait for firmer evidence before making any policy change at least in the absence of any strong arguments for an immediate change.

And indeed this.

For there to be a case for easing policy I will need to expect weakness in output to be large enough to compensate for any overshoot in inflation on the assumption that policy is unchanged in the near term

This led to the view he would not be voting for any Bank Rate cuts a view which was reinforced by those who were reviewing events on the day.

MartinWeale‘s doubts over need for interest rate cut boost markets (Guardian)

Hold fire on interest rates says MPC member MartinWeale ( Daily Telegraph)

MartinWeale on the Bank of England’s policy response to Brexit. Steady as she goes… ( Frances Coppola ).

Such a view would be consistent with the fact that he has twice undertaken a series of votes for a Bank Rate rise ( 12 votes in total I believe) and even briefly rejected the mantra of Forward Guidance of “lower interest-rates for longer”. However of course there is something to be learned about the fact that on each of those three occasions he was found later to be retreating with his tail between his legs.

Today

Here is the conclusion of the article on the interview he has given to Chris Giles of the Financial Times.

One of the UK’s top monetary policymakers has indicated he has changed his mind after a series of negative business surveys and now favours an immediate stimulus for the UK economy……..The new stance of Martin Weale, an independent member of the Bank of England’s Monetary Policy Committee.

Well not that independent currently! Top? Only as in spinning like one.But what is the firmer evidence for his change of mind? The emphasis on what is an extraordinary second sentence is mine.

What I said last week is that I would like more information as well as more reflection and I have had more information. Although you can’t say there’s a clear signal, if you spend all the time waiting for a clear signal, it never comes.

Whether the latter applies in his mind to the way he called for interest-rate rises then reversed such calls I do not know but what changed his mind?

They (Markit Purchasing Managers Indices) are the best short-term indicator we have at the moment. I certainly feel they are very material for the decision we’ll be taking next week,” he told the FT, adding that they were “a lot worse than I had thought” and showed “expectations have worsened sharply”

Okay so a reading of 47.7 ( on a scale which for Greece has gone into the low 30s) is much “worse than I had thought”. Odd when you consider that in some respects it is better than what the Bank of England was saying beforehand. Actually it indicates a possible mild recession if this next bit is true.

much of course depends on whether we see a further deterioration in August or if July represents a shock-induced nadir

The answer to which is unknown right now but you see as he panics there is a problem. He doesn’t think it will make much difference anyway!

One of the MPC’s problems is that monetary policy works with a delay, so action in August is unlikely to give the economy a quick boost. “If we’re talking about having an effect by the end of the year, there is very little that the bank can do,” Mr Weale said

Actually if you take the traditional view then a Bank Rate cut takes around 18 months to take effect so it will be in full force around New Year 2017/18 about which the PMI survey told us virtually nothing! Indeed he has to face the reality that the Open Mouth Operations of Bank of England policymakers like him have in fact made things worse.

Mr Weale rejected criticisms that the BoE’s warnings about the EU referendum outcome had created a self-fulfilling prophesy of doom.

Even the Financial Times with its long record of toadying to policymakers must have raised that issue which is revealing in itself.

What about QE?

Martin Weale seems rather keen on it.

Asset purchases are still likely to be effective,

Let us take a look at the ten-year Gilt yield which is 0.79%. So any gain from lower bond yields is pretty much used up. Has nobody told Martin? He does say in the interview that he is not keen on “discussing moves in financial markets.” Even if we go to the thirty-year yield it is only 1.67% which is extraordinarily low for the UK. For newer readers I recall days when the long-term Gilt yield was 15%. So any addition would be like tipping a thimble into the river Thames.

A theme song for Martin Weale

I have been receiving suggestions online but let me open with Kylie.

I’m spinning around
Move out of my way…….

Mistakes that I made givin’ me the strength
To really believe

And as suggested here are Dead or Alive

You spin me right round, baby
Right round like a record, baby
Right round round round

August will be Martin’s last vote at the Bank of England and it seems sadly thematic that after a year of votes for higher interest-rates he will panic and vote for a cut. Students at Kings College London may reasonably wonder what the value of his teachings will be?

Negative interest-rates are just around the corner

You might reasonably think that it is always RBS ( Royal Bank of Scotland) and you would be right! From the BBC today.

Natwest and Royal Bank of Scotland (RBS) have warned businesses they may have to charge them to accept deposits due to low interest rates……The move, if enacted, would make them the first UK banks to introduce negative interest rates, in effect, charging to deposit money.

I have to confess that the next bit made me wonder how many of the businesses concerned were still paying high interest-rates on the products that RBS miss-sold to them?

A spokesperson for Royal Bank of Scotland, which owns Natwest, told the BBC the letter was sent to just under 1.3 million of the combined business and commercial customers of the two banks.

Comment

There is much to consider here and let me open with an irony. There were, in my opinion enough votes for a Bank Rate cut next week anyway (6-3 I had it). So Dr.Weale has panicked and perhaps made things even more uncertain unnecessarily. He has also sent the UK Pound £ lower which is not what is required right now. He would have done much better to consider if after all the easing that has happened we need ever more that perhaps that is not the answer?! Also we get the second quarter UK GDP numbers tomorrow so if he had waited he would have seen more of the evidence he claims to want as in knowing where we were before the EU Referendum.

Meanwhile the UK looks set to move even closer to and possibly into the world of negative interest-rates. I fear that rather than making things better they will make them worse as so far no-one has negotiated their way out of them. Also there is any irony in a way in it being driven by a vote on the European Union as it is one of its products the Euro which has turned out to be like a supermassive black hole for negative interest-rates.

Mind you Dr.Weale has kindly provided a critique of his and the Bank of England’s independence

I have had no sense of the MPC and the Treasury trying to drag the economy in different directions