Central Banks what are they good for?

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by Shaun Richards

Today is full of central bank meetings and they all have the same problem which is inflation which is proving not to be “Transitory” as they promised and has gone much higher than they forecast. Let me give you an example of this from my home country the UK. Only 6 weeks ago the Bank of England forecast this.

CPI inflation is then expected to rise to 4½% in November and remain around that level through the winter, accounted for by further increases in core goods and food price inflation.

Whereas in fact it rose to 5.1%. If they are so wrong about what is happening at the time how can we have any confidence in the next part?

CPI inflation is now expected to peak at around 5% in April 2022, materially higher than expected in the August Report.

You should not have any because with the trajectory of domestic energy prices April looks set to be higher with 6% or more quite possible.

Federal Reserve

We can look back to last night and we were expecting this after Chair Powell hinted at it a couple of weeks ago.

 In light of inflation developments and the further improvement in the labor market, the Committee decided to reduce the monthly pace of its net asset purchases by $20 billion for Treasury securities and $10 billion for agency mortgage-backed securities.

So in January they will buy at half the previous pace ( $60 billion in total rather than $120 billion), The problem comes if we switch to looking at the inflation issue because even at the new faster pace of reduction they will still be pumping things up into 2022. Whereas if we think that Europe has a problem with inflation on the HICP measure is around 5% the US is at 7.9% on the same measure and remember it ignores owner-occupied housing.

There was also this as Reuters pointed out.

officials at the median projected the Fed’s benchmark overnight interest rate would need to rise from its current near-zero level to 0.90% by the end of 2022. That would kick off a hiking cycle that would see the policy rate climb to 1.6% in 2023 and 2.1% in 2024 – still loose by most estimates.

I have a couple of problems with this. Firstly interest-rate moves take time ( around 18 months) to fully impact so this is no use at all even for inflation next year. That can be added to by noting that raising interest-rates AFTER inflation has risen is exactly what the policy of making central banks independent was supposed to avoid. On such a road it will be making the same mistakes as the politicians it replaced. Next comes the size of the interest-rate moves which are very small and take years.

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All of that assumes they actually happen as we know that central banking Forward Guidance in this area has frequently been misleading.

Bank of England

We can look at this as being in the past as they voted last night although the voting is not announced until noon today. In terms of QE bond buying it is ahead of the US Federal Reserve because it completed its programme to buy £875 billion of UK government bonds yesterday. Although of course that means it has been expanding its  balance sheet into quite a rise in inflation.

The mess that it has got itself into was highlighted by this from Jonathan Haskel on the 23rd of November.

So the puzzle is: why did inflation run away then, but not now? Are we somehow better insulated from these
and other shocks to the economy or are we destined for a repeat of the 1970s?

As you can see he had already answered his own question and yesterday’s inflation numbers offered a critique to his view. Even worse for him was this bit.

First, much of the variation in inflation is due to global factors such as imported goods and energy prices. I
expect much of that variation to be transitory.

Then he repeated what has become the Bank of England mantra.

The message of this chart future rises in Bank Rate are largely indicative of the recovery. In my view, the prospective rise in Bank Rate from its emergency level – whenever that comes – is not a bug, but a feature. It reflects the success of fiscal, health and science policy in dealing with worst economic shock in 100 years.

So if they do not raise Bank Rate they will have failed? Of course their Forward Guidance failed rather spectacularly last month and if they took notice of this earlier will do so again today.

UK flash #PMI output index, covering both services and manufacturing, slides from 57.6 in Nov to 53.2 in Dec, amid new virus wave. PMI charted here against #BoE rate decisions shows now moving towards rate cut territory ( @WilliamsonChris )

Just to be clear I have my doubts about the usefulness of the PMI business surveys but we know that at least some policymakers follow it and that they were told about it yesterday under embargo.

ECB

This is much simpler as I do not expect much at all because they face something described by Muse.

Super massive black hole
Super massive black hole
Super massive black hole
(Super massive black hole)

There will be some hot air about the PEPP emergency QE programme which I always predicted will be fully used in spite of the official claims they may not. But it will run for the maximum term they established and is now over a one trillion Euros larger than the original 750 billion. There may be a swerve in that there could be a reduction in the rate of purchases for the last 3 months but take care as the same sources are predicting a rise in monthly purchases under the other QE programme called APP. So take care as an announced reduction could in fact be higher purchases over time or as I have long argued QE to infinity.

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CBRT

The Central Bank of the Republic of Turkey or CBRT may well be voting for Christmas today. By that I mean another interest-rate cut and let me show you what the markets are thinking about this.

The Turkish lira tumbles to another record low, falling past the psychologically important 15-per-dollar mark for the first time ( @Bloomberg)

I am not sure about the psychologically important bit but perhaps they said the same for 14.13, 12 and 11. In terms of the UK Pound it now buys some 20 Turkish Lira. What I feared back on October 11th has taken place.

In a world of inflationary pressures with energy prices to the fore you might think that at best the interest-rate move above was risky.Next you would look at the exchange-rate and anyone with any experience of looking at the Turkish Lira would do so with quite a bit of trepidation.

On that day people were worried it might break 9 versus the US Dollar. So whatever happens today a wave of exchange-rate driven inflation is on its way to Turkey.

Comment

As you can see from the above central banks are not good for much when it comes to tightening policy. Actually these days that applies to reducing the easing as well! Because their abuse of language exrtends beyond the way they have deployed the word “Transitory”. One has in fact moved today at the time of writing.

Norges Bank’s Monetary Policy and Financial Stability Committee has unanimously decided to raise the policy rate from 0.25 percent to 0.5 percent.

But even here the problem is that they are chasing inflation rather than getting ahead of it or as they put it.

Higher electricity prices have resulted in elevated CPI inflation, but underlying inflation is lower than the inflation target.

Ag but “underlying inflation” is okay as we return to abuse of language. Oh hang on.

Rising wage growth and higher imported goods inflation is expected to push up underlying inflation ahead.

Notice also how they seem to think higher wages are a bad thing.

The Committee was also concerned with a potentially higher-than-projected rise in domestic wages and prices

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