Hard Times at the Bank of England on both Forward Guidance and inflation expertise

by Shaun Richards

It is time for us to dip back into the data in the UK economy as we look at retail sales, But before we get there we have seen another development and it has come from UK Gilt yields which are the cost of borrowing for the UK government. I have been writing for some time that they have been very low due to the fear for some or expectation for others that the Bank of England will start a new phase of QE ( Quantitative Easing) bond purchases. At the nadir the UK ten-year yield dipped below 1.2% which still left plenty of margin as the Sledgehammer QE drove it down to 0.5%. I still consider that to be madness but it is something the media and other economists do not understand so any debate stalls. But the Gilt yield issue is that it has risen to 1.37% which if it goes a little further will have economic effects via fixed-rate mortgages and business borrowing.

In terms of context other bond yields have also risen but the UK has seen its rise faster. Even I cannot entirely avoid politics so let me add that there were roads this week when Brexit developments ,might have led to UK Gilt yields falling due to expectations of more Bank of England QE in spite of the international trend. Should fixed-rate mortgages rise in price then we can perhaps expect a little more of this.

The UK housing market ended 2018 on a weak note with uncertainty still biting, alongside continuing lack of stock and affordability issues, according to the December 2018 UK Residential Market Survey. ( Royal Institute of Chartered Surveyors or RICS)

Also they expect things to get worse.

Moving forward, however, over the next three months sales expectations are now either flat or negative across the UK. The headline net balance of -28% represents the poorest reading since the series was formed in 1999. The twelve-month outlook is a little more upbeat, suggesting that some of the near-term pessimism is linked to the lack of clarity around what form of departure the UK might make from the EU in March.

Worse for them I mean as lower house prices would benefit first time buyers who have seen house prices accelerate away from them in nominal and real terms in the credit crunch era.

Also they seem to have their doubts about the promised future supply.

Meanwhile it is hard to see developers stepping up the supply pipeline in this environment. Getting to the government’s 300,000 building target was never going to be easy but pushing up to anywhere near this figure will require significantly greater input from other delivery channels including local authorities taking advantage of their new-found freedom.

That of course would be a case of history on repeat or as the Four Tops put it.

Now it’s the same old song
But with a different meaning
Since you been gone

Ben Broadbent

The issues above will not make the Bank of England very happy and this will add to the dark cloud around Deputy Governor Broadbent otherwise known as the absent-minded professor. Here is an excerpt from something I posted on the Royal Statistics Society website in October.

” there are fewer than 10 million owner occupier mortgages. Is the cost of a house to someone who happens
already to have paid off his or her mortgage really zero?”

So we see that we cannot use something which is used around 10 million times but we can use the Imputed Rents which are used precisely zero times! I do not recall anyone arguing for mortgage costs to be used for those who do not have one, in the way he is calling for rents to be used for those who do not pay them. For example the RPI has mortgage costs, but also as a considerably larger component house prices  via  the use of depreciation.

The absent-minded professor spoke up strongly for the Rental Equivalence model which the House of Lords rejected this week. Also they were disappointed with other aspects of his performance.

Let me end by congratulating the Lords and Baroness Bowles on pressing the Deputy Governor responsible for the RPI on the issue of what Yes Prime Minster satirised as “Masterly Inaction”. As they point out there are changes which could have been made as opposed to the state of play during his tenure.

“That process seems to have stalled.”

Retail Sales

These were something of a journey and had a kicker that seems to have been missed in the melee so let me explain.

When compared with the previous month, the quantity bought in December 2018 decreased by 0.9%, as all sectors except food stores and fuel stores declined on the month.

So down except we know the numbers are regularly erratic and are likely to be even more so with the advent of Black Friday in November. Let us therefore look for more perspective.

In the three months to December 2018, estimates in the quantity bought decreased by 0.2% with declines across all main sectors except fuel.

As to the wider impact Rupert Seggins has crunched some numbers.

UK retail sales fell -0.2%q/q in the final quarter of 2018, indicating that the retail sector took -0.01% off GDP growth in Q4.

If we move to the annual comparison though we get some relief as the volume figures were 3% higher if we return to the December numbers with fuel sales and 2.6% without or a 0.17% addition to GDP using Rupert’s calculator. But there has been a slowing even with such numbers.

Looking at annual growth rates, the whole of 2018 increased by 2.7% in the quantity bought; an annual slowdown in comparison with the peak of 4.7% experienced in 2016.

One of the things which bemuses me from time to time is that it is often those who support issues such as climate change who seem most unhappy about a decline in retail sales growth missing the logical link. But my main point here is that if we compare the volume and sales figures retail inflation is a mere 0.7% on an annual basis.

Comment

It was only last week that I suggested that the Bank of England was giving the wrong Forward Guidance about interest-rates as the economic outlook darkens. If the rough and ready calculator for retail inflation is in any way accurate then that is reinforced by today;s number and that adds to the lower consumer inflation numbers we saw earlier this week. Added to that the Bank of England has publicly backed the wrong horse in the inflation measurement stakes.

Even worse it has backed the establishment line driven by Her Majesty’s Treasury which is precisely the body it is supposed to be independent from. Perhaps that is something to do with the fact that the Deputy-Governors are HM Treasury alumni in a case of what in another form we call “regulatory capture”.

 

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