Yesterday saw Bank of England Governor Mark Carney in full flow at the Bank of England itself in a type of last hurrah. I am grateful to him for being kind enough to exhibit at least 4 of the themes of this blog in one go! That is quite an achievement even for him. I will start by looking at something of a swerve which was introduced by the then Chancellor George Osborne and it has never received the prominence I think it deserves.
A major improvement to the inflation targeting framework itself was to confirm explicitly beginning with the
2013 remit that the MPC is required to have regard to trade-offs between keeping inflation at the target and
avoiding undesirably volatility in output. In other words, the MPC can use the full flexibility of inflation
targeting in the face of exceptionally large shocks to return inflation to target in a manner that provides as
much support as possible to employment and growth or, if necessary, promotes financial stability.
I make the point because you could argue from that date the Bank of England was acknowledging that its priority was no longer inflation targeting. Some of this was accepting reality as back in 2010 it had “looked through” inflation over 5%. To be more specific it is now concerned about inflation under target but much less so if it is above it. This is confirmed in the speech in part of the section on the period after the EU Leave vote.
Inflation rose well above the 2% target, eventually peaking at 3.1% in late 2017, an overshoot entirely due to
the referendum-induced fall in sterling.
UK growth dropped from the fastest to the slowest in the G7.
He cut interest-rates in this period in spite of the fact that the lower UK Pound £ meant that inflation would go in his words well above the 2% target. Actually tucked away on the speech is something of a confession of this.
In the wake of the referendum, the MPC’s
aggressive monetary easing, despite a sharply depreciating currency and rising inflation,
The Unreliable Boyfriend
It seems he cannot escape behaving like this and this week he has given us a classic example. We only need to go back to Wednesday for this.
In a wide-ranging interview with the Financial Times, the outgoing governor warned that central banks were running out of the ammunition needed to combat a downturn.
Yet a mere 24 hours or so later things were really rather different.
Of course, the effectiveness of unconventional policies means that there is considerable total policy space.
In the UK, the MPC can increase its purchases of both gilts and corporate bonds, providing stimulus through
a number of channels including portfolio rebalancing……..All told, a
reasonable judgement is that the combined conventional and unconventional policy space is in the
neighbourhood of the 250 basis points cut to Bank Rate seen in pre-crisis easing cycles.
Glen Campbell must be a bit disappointed as he famously took 24 hours to get to Tulsa whereas Governor Carney has managed the road to Damascus in the same time. Perhaps the new Governor Andrew Bailey had been on the phone. Anyway however you spin it “running out of ammunition” morphed into “considerable total policy space”.
Cutting Interest-Rates
Regular readers will be aware that I have been suggesting for a while now that the next move from the Bank of England will be to return us to a 0.5% Bank Rate. This was regarded as an emergency official interest-rate at the time but as so often language has been twisted and manipulated as it turned out to be long-lasting. I will discuss Forward Guidance in detail in a moment but for the moment let us just remind ourselves that Mark Carney has regularly promised interest-rate rises during his Governorship. Whereas yesterday we were given a hint of another U-Turn.
This rebound is not, of course, assured. The economy has been sluggish, slack has been growing, and
inflation is below target. Much hinges on the speed with which domestic confidence returns. As is entirely
appropriate, there is a debate at the MPC over the relative merits of near term stimulus to reinforce the
expected recovery in UK growth and inflation.
For newer readers central bankers speak in their own language and in it this is a clear hint of what is on its way.
Forward Guidance
The Governor cannot avoid a move which backfired rather quickly in his term.
The message the Committee gave UK households and businesses was simple: the MPC would not even
think about tightening policy at least until the unemployment rate had fallen below 7%, consistent with the creation of around three quarter of a million jobs.
The simple sentence below must have stung as he wrote it and later spoke it.
In the event, the unemployment rate fell far faster than the MPC had expected, falling below 7% in February
2014.
I will spare you the re-writing of history that the Governor indulges in but he cannot avoid confirming another issue I have raised many times.
As part of these exercises, the MPC revised down its (hitherto private) estimate of equilibrium unemployment rate from 6½% in August 2013 to 5½% in August 2014,
Actually the “hitherto private” claim is not true either as we knew. Also the equilibrium unemployment rather according to the Bank of England continued to fall and is now 4.25%. Thus as a concept it is effectively meaningless not only because it became a laughing stock but it’s use as an anchor was undermined by all the changes.
Anyway as we approach the end of the week it is opportune to have some humour, at least I hope this is humour.
People understood the conditionality of guidance, as they and the MPC had learnt that there was still considerable
spare capacity in the economy.
I do love the idea that the (wo)man on the Clapham Omnibus had any idea of this! For a start it would have left them better informed than the Governor himself.
Inflation Targeting
I have argued many times that it needs reform and a major part of this should be to realise the influence of asset prices both pre and post credit crunch. On that road house prices need to go into the consumer inflation measure.
But apparently things have gone rather well.
This performance underscores that the bar for changing the regime is high.
I am not sure where to start with this.
Inflation expectations have remained anchored to the target, even when CPI inflation has temporarily moved away from it.
After all the Bank of England’s own survey told us this only last month.
Asked about expectations of inflation in the longer term, say in five years’ time, respondents gave a median answer of 3.6%, up from 3.1% in August.
Comment
We can continue the humour with some number crunching Mark Carney style.
At present, there is sufficient headroom to at least
double the August 2016 package of £60 billion asset purchases, a number that will increase with further gilt
issuance. That would deliver the equivalent of around a 100 basis point cut to Bank Rate on top of the near
75 basis points of conventional policy space. Forward guidance at the ELB adds to this armoury. All told, a
reasonable judgement is that the combined conventional and unconventional policy space is in the
neighbourhood of the 250 basis points cut to Bank Rate seen in pre-crisis easing cycles.
So if 1% is from QE and 0.65% from an interest-rate cut to his “lower bound” of 0.1% then that means he is claiming that Forward Guidance can deliver the equivalent of 0.85% of interest-rate cuts. That really is something from beyond even the outer limits of credibility. Oh and I have no idea why he says “near 75 basis points of conventional policy space” when it is 0.65%.
As I have been writing this article a fifth theme of mine has been in evidence which is that these days Monetary Policy Committee members only seem to exist to say ” I agree with Mark”.
“If uncertainty over the future trading arrangement or subdued global growth continued to weigh on UK demand then my inclination is towards voting for a cut in bank rate in the near term,” she says. ( The Guardian)
That is Silvano Tenreyro who has rushed to be in line and it is especially disappointing as she is an external member. It is the internal members that have historically been the Governor’s lapdogs.