Bank of England Forward Guidance keeps flip-flopping

One of the long-running themes of my work is that central bankers run in a pack or if you are feeling harsh have a job-share on the same brain cell. In my interview with earlier this week I described them as being like Stepford Wives. So you can imagine I was expecting to hear from the Bank of England which has been pretty quiet through a phase where we have seen interest-rate cuts from the US Federal Reserve and the European Central Bank of ECB amongst others. Indeed according to the Wall Street Journal the Bank of Japan is on the case as well.

Bank of Japan Gov. Haruhiko Kuroda said Tuesday cutting short-term interest rates would be effective in buoying the economy, confirming that the option remains on the table despite a backlash from the financial sector.

So enter Michael Saunders of the Bank of England who is giving a speech in Barnsley and he set out his stall early.

With persistently high Brexit uncertainties and softer global growth, the UK economy has weakened markedly in recent quarters, opening up a modest amount of spare capacity.

Although it is only one sentence there are already two problems with this. The first is that the Brexit uncertainty strengthened the UK economy in the first quarter with GDP growth of 0.5%. Also we can see that he is back to the Ivory Tower view of events where “spare capacity” is based on the output gap. As a reminder the following sequence of events would be comical if they were not so serious. But we were guided towards an unemployment rate of 7% then to “equilibrium” unemployment rates of 6.5%, 6%,5,5%, 4.5% and well you have the idea. In essence and this is another theme their so-called theory in fact simply chases reality after a delay.

Next we get a bit of a standard Bank of England statement.

The economy could follow very different paths depending on Brexit developments. But in my view,
even assuming that the UK avoids a no-deal Brexit, persistently high Brexit uncertainties seem likely
to continue to depress UK growth below potential for some time, especially if global growth remains disappointing.

Here he seems to be mixing two concepts as he meshes the Brexit issue with the global situation. Sadly he is ploughing on with the output gap theory and I am sorry to say he is embarrasing himself as the tweet below from Nicola Duke shows.

When BoE Saunders voted hikes in 2017: Wages 2.3%  CPI 3.1%  GDP 1.7%  Unemployment 4.7%


Today he wants cuts: Wages 3.9%  CPI 1.7%  GDP 1.8% Unemployment 3.8%


These people are paid to do this. I’m not an economist but my common sense tells me they don’t do a very good at their job.

As you can see the idea of using the labour market as a signal for an Ivory Tower style output gap falls flat on its face here. Wage growth is now much better and the unemployment rate is a fair bit lower.

So what is the prescription from Dr Saunders? The emphasis is mine

In such a scenario – not a no-deal Brexit, but persistently high uncertainty – it probably will be
appropriate to maintain an expansionary monetary policy stance and perhaps to loosen further. Of course, the monetary policy response to Brexit developments will also take into account other factors
including, in particular, changes in the exchange rate and fiscal policy.

Forward Guidance

Let me now link all this to the title of my piece today and look at the latest version of Bank of England Forward Guidance from last week’s Minutes.

In the event of greater clarity that the economy is on a path to a smooth Brexit, and assuming some recovery in global growth, a significant margin of excess demand is likely to build in the medium term. Were that to occur, the Committee judges that increases in interest rates, at a gradual pace and to a limited extent, would be appropriate to return inflation sustainably to the 2% target.

That didn’t last long did it? If we consider the theory it is yet another disaster for the output gap theory of the Bank of England’s Ivory Tower as the “significant margin of excess demand” lasted for all of one week!

As for Micheal I am afraid it is even worse because as recently as the 10th of June he was telling us this. The emphasis is mine

To sum up, in my view, the output gap is probably closed and, assuming a smooth Brexit (as well as the
asset prices prevailing at the time of the May Inflation Report), risks to consumer spending probably lie to the
upside of the latest IR forecast. This would push the economy even further into excess demand than the
central projection in the latest IR, with the jobless rate likely to reach new lows. In turn, this would be likely to
reinforce upward pressure on domestic cost growth and inflation over the next 2-3 years. In this case, Bank
Rate will probably need to rise further over the forecast period than implied by the market path used in the May Inflation Report to keep inflation on target over time.

Indeed he claimed he was keen to get on with it.

But there would be costs if we delay tightening until all the potential warning signs across pay, capacity and prices are flashing red. Such an approach would make it less likely
that tightening would be limited and gradual, and more likely that the economy would face a painful

What has caused this?

Reading the speech Michael Saunders has been reading the economic surveys but seems not to have read then all as this bit illustrates.

In particular, economic growth has
slowed much more here than in the US and EA, even though the rise in global trade tensions has not led to
any actual or threatened hikes in tariffs on UK exports.

Now let me remind you of Tuesday’s Markit PMI report for the Euro area.

The survey data indicate that GDP looks set to rise
by just 0.1% in the third quarter, with momentum
weakening as the quarter closed.

The actual data for the UK is that GDP grew by 0.3% in July which wiped out the drop in the second quarter so as it stands “slowed much more here” seems rather odd.

Next we find that he is absolutely committed to his output gap theory until it does not suit.

As a result, capacity pressures are no longer increasing and may be starting to ease. To be sure, the jobless rate (3.8%) remains slightly below the MPC’s estimate of equilibrium (4¼%). But taken as a whole, business surveys suggest that capacity use in firms has fallen below average.

Oh hang on it’s now back.

In my view, the economy now (end of Q3) probably has an output gap of perhaps ⅓% or ½% of GDP or so.


A lot of this is very damning for both the Bank of England and Micheal Saunders who seems determined to live up to the unreliable boyfriend moniker applied to his boss Mark Carney. But there are other issues here and is starts well as at times like these there is much to welcome about some honesty.

For a monetary policymaker, an extra complexity is that it may well be unclear for some time which scenario
is likely to unfold.

But then look where it takes him.

However, this is not necessarily a recipe for policy inertia.

He seems to want to splash around in the dark.

I would prefer to be nimble, adjusting policy if it appears necessary to keep the economy on track, and accepting that it may be necessary to change course if the outlook changes

Also we have learned to be very afraid of statements like this.

BoE’s Saunders says he is not a fan of negative interest rates, adding that the floor for UK interest rates is close to zero, marginally positive ( @DailyFXTeam )

This is because such statements are PR in case he does vote for native interest-rates he can present it as something he did not want. So why does he feel the need to point that out?

Just for clarity “the floor for UK interest-rates” is considered by the Bank of England to be 0.1%. This replaced the 0.5% that Governor Carney kept telling us about round about the time he cut to 0.25%. Will Britney be on the Bank of England loudspeakers?

Oops, I did it again
I played with your heart
Got lost in the game

Even worse is the possibility that Michael Saunders is simply chasing the markets because as regular readers will be aware UK Gilt yields have been predicting an interest-rate cut for some time.

Number Crunching.

Here is a reply I sent to Bloomberg in response to their social media reports on the UK Pound £

In a week where use of language is being challenged how about “woes have multiplied” for a fall of all of 0.3% as I type this?





UK house prices rose by 5.9% in February according to the Halifax

This morning has brought news that is like a ray of sunshine to Bank of England Governor Mark Carney. Indeed I am told he keeps checking if the sun has gone over the yardarm. From Reuters.

British house prices jumped in February, rising by 5.9 percent from January, mortgage lender Nationwide said on Thursday.

In annual terms, prices were up by 2.8 percent in the three months to February, the lender said.

A Reuters poll of economists had pointed to a 0.1 percent increase on the month and a 1.0 percent annual rise in prices.

Halifax’s index has tended to be more volatile than other measures of house prices of late.

Actually if you crunch the numbers UK house prices were 5.3% higher in February than in February 2018. So any junior at the Bank of England spotting this and telling the Governor will go straight on the fact-track promotion scheme. In case you are wondering why there is a difference between that and the number reported it is because the Halifax uses quarterly and not monthly numbers for annual growth.

In the latest quarter (December – February) house prices were 1.8% higher than in the preceding three months (September – November).

As we break the numbers down we see that there is a clear issue with monthly volatility with the last four months showing growth of -1.2%,2.5%,-3% and now 5.9%.So the series has increasingly placed itself in question.

Maybe they have been looking at Fulham which for some reason has seen quite a pick up in activity recently although care is needed as it saw drops this time last year.I also note that some of you have been pointing out a bit of a boom in the Midlands. Perhaps the Halifax only went to these two areas in February but however you try to spin it this months number reduces the credibility of the series.

Actually it also has rather caught out Silvana Tenreyro of the Bank of England who has not been keeping up with current events.

And official UK house price growth has also fallen, from an annual rate of 8% in mid-2016 to below
3% in the latest data. The growth rate of the Nationwide house price index, a timelier indicator, has fallen
further still.


She sort of backs the Bank of England party line as she says “I agree with Mark” with little apparent enthusiasm.

So while I still envisage that in the event of a smooth Brexit we will need a small amount of tightening over
the next three years, before voting for any rate rises I would want to be confident that demand was growing
faster than supply.

She also repeats the Bank of England standard that whilst they are giving us Forward Guidance of higher interest-rates in fact interest-rates may go up or down.

As the MPC has long emphasised, the monetary policy response to such a scenario will depend on the
balance of these effects on supply, demand and the exchange rate. In my judgement, a situation where the
negative demand effects outweigh those other effects is more likely, which would necessitate a loosening in
policy. But it is easy to envisage other plausible scenarios requiring the opposite response.

Although as no doubt many of you have already spotted she seems to have “a loosening in policy” in mind. Also she does seem rather obsessed with one subject.

And however Brexit affects the economy, my monetary
policy decisions will continue to be framed by the MPC’s remit.

As to the more technical details after more than a few assumptions she thinks she has detected a rise in productivity growth.

More sophisticated statistical filtering
methods tell a similar story to these simple averages, with the trend of four-quarter productivity growth
picking up gradually from 0.1% in 2012 to 0.7% in 2018 when using the backcast data.

I would just warn that the accuracy of the numbers here may not be enough to support such filtering. Also her view that these numbers tend to be revised higher is not having a good morning as Eurostat has just revised Euro area GDP growth for the autumn of this year down from 0.2% to 0.1%


Michael has discovered something which I first reported on here nearly ten-years ago.

Since late 2017, the MPC has increased the policy rate by 50bp, in two 25bp steps. Consistent with MPC
guidance, the rise in the policy rate has been gradual and limited……………However, pass-through to retail interest rates – both deposit rates and lending rates – has been unusually small. Many household interest rates have barely changed.

Actually it is the reason why QE was introduced because policymakers thought that the large cuts in Bank Rate would do the trick but found that some interest-rates did move but others did not. Actually some rose as I recall credit card interest-rates rising from circa 17% to more like 19%. So it is nice to see Michael catching up with reality. Some of you may already be experiencing a version of this which is far from unexpected here.

It is a similar story for rates on new household time deposits: a rise of 15bp so far (roughly 30% of
the rise in Bank Rate), versus average pass-through of just above 100% in prior MPC hiking cycles.

It seems that those looking for deposits and savings have little or no faith in the Forward Guidance of the Bank of England. Also it pumped them full of liquidity with the latest version of that being the Term Funding Scheme and if we add up such schemes they are still providing some £137 billion of liquidity. Or to put it another way that means that banks and building societies have much less need to compete for deposits. It also directly leads into this.

The average rate on new mortgages (covering both fixed and variable rate loans) is up by only 10-15bp, roughly 30% of the rise in the appropriate mix of Bank Rate and swap rates.

Brighter members at the Bank of England will consider that to be quite a triumph.

Frankly the section on higher interest-rates just seems like hot air.

In that scenario, further UK monetary tightening – limited and gradual – probably will be needed over time.

Okay but not now ( unlike when they wanted to cut which was immediate)

However, the possibility that monetary tightening might be needed in the future does not necessarily mean
we need to tighten now

You may have noted how quickly the rises went from probable to possible and we quickly see they may vanish in a puff of smoke.

And as we have said before, the monetary
policy response to Brexit, whatever form it takes, will not be automatic and could be in either direction.


The farce that is Forward Guidance is a saga that no-one seems able to stop. Supposedly individuals and businesses are being helped in their planning by being informed of what the Bank of England intends to do with interest-rates. The most obvious problem is that when there was a response from the ordinary person via a higher uptake in fixed-rate mortgages the Bank of England then cut interest-rates in a sharp about turn. I never really imagined many would follow this outside of financial markets but that must have cut the number even further.

As to house prices we are reminded of the flawed nature of many of the indices which measure them by today’s extraordinary number from the Halifax.

The Investing Channel