It has been a rough ten days or so for the Bank of England since its last policy meeting and we have a new turn in its policy which is the intervention of its Financial Policy Committee in the UK bond market. But let me start with last night as a policymaker revealed that she at least was thinking along the lines I suggested for the last meeting.
LONDON, Oct 3 (Reuters) – Bank of England policymaker Catherine Mann said her vote last month to raise Bank Rate by 0.75 percentage points reflected her concerns about a weak currency, rising inflation expectations and the boost to household incomes from an energy price cap.
In isolation I agree with that and last night she went further.
Mann said her vote was driven by factors that had been building over the course of the year, including how tighter U.S. monetary policy had tended in the past to weaken sterling and increase British inflation, which is now near a 40-year high.
She has spoken previously about concerns about the currency and inflation risks. This is something of a trend in that US members of the Monetary Policy Committee seem to be more on the ball on this subject than UK ones. As you can see below she also went further.
“I do see increasingly embedded inflation, I do see inflation expectations drifting, I do see a sterling depreciation spillover and I do see daylight between real incomes and real consumption possibilities,” she said in a discussion at Canada’s C.D. Howe Institute.
She has been consistent on this subject as here are her words from the 20th of June.
I voted for a 50 basis point increase at the last MPC meeting. In my view, a more robust policy move, based on both domestic conjuncture and commensurate with the global factor, reduces the risk that domestic inflation already embedded is further boosted by inflation imported via a Sterling depreciation.
It is a shame that she has not been able to influence the others who have assumed the ostrich position on this issue.
Buying More UK Bonds
Having been such a critic of the plans to sell some of the QE bond holdings as you can imagine I had a wry smile as we saw the Bank of England buy more! What could fo wrong with selling into a falling market. We did see something of a swerve as this was presented as a market move and so “not QE”, and we saw the Financial Planning Committee or FPC move out of the shadows and authorise it. In terms of detail I found that fascinating as 4 of the members which include the Governor are the same as the MPC. But it is so little known that that seemed to escape people including those who should know better.
Where are the eight members of the MPC? Why have they not demanded an immediate meeting – actions are being taken that do not involve them but should. Why? If @hmtreasuryis running monetary policy and does not want them to intervene they should resign ( @D_Blanchflower )
It appears he was unaware how many of them were also on the FPC. In fact social media had a really bad time as for example here is Jess Phillips who is a member of parliament for the Labour party
First rule of politics -“learn to count!” Perhaps Kwarteng can now sit in a room and be forced to count to 65 Billion which was the cost of his mistake.
I do not know about Chancellor Kwarteng’s counting skills but I would suggest Jess starts with her own. For example the £65 billion figure is wrong as several days into the scheme we have spent £3.7 billion with only £22 million added yesterday, So even if we spent the maximum £5 billion on the remaining days of this scheme we would be well short of that. Also on a mark to market basis it is currently in profit.
What has happened is that partly by luck ( US bond yields have fallen pulling ours lower) and partly because the issue was self-fulfilling as pension funds acting made it worse for other pension funds, the situation has calmed and the market rallied. There are two deeper questions here which have been ignored in the furore. The first is one of my themes which is can we ever escape QE? The second is that much of the game here has been the implicit point that the Bank of England is offering a type of put option on the market. If we go to certain levels it will intervene. That brings me back to a point I make often, why so we never address the issue of why do we need so much intervention/help?
The issue of what will happen to the plans for bond sales is left a bit hanging in the air. I note they are still planned to start before the next MPC meeting.
The first APF gilt sale operations will now take place on 31 October and proceed thereafter. The schedule for operations for Q4 2022 will be announced in due course.
The MPC’s annual target of an £80bn stock reduction in gilts held in the APF is unaffected and unchanged.
They are probably already regretting not making the date after the next meeting. I would not be surprised if the whole idea is quietly abandoned, but events are moving quickly meaning even the end of the month is a long way away in financial market terms.
Mortgage Rates
It looks as though we are beginning to see a turn here too which is related to the bond yield points I have made above. As I type this the five-year yield has pulled back to 4%. Daily moves can of course change but I have the feeling that just as the media have caught up with the push for higher mortgage rates last week the trend is now the other way.
Comment
In fact some real food for thought for the Bank of England came from a land down under this morning. It may well be the first signal of something I have been suggesting for months now.
At its meeting today, the Board decided to increase the cash rate target by 25 basis points to 2.60 per cent. It also increased the interest rate on Exchange Settlement balances by 25 basis points to 2.50 per cent ( Reserve Bank of Australia)
Are central bankers having second thoughts? Well there is a hint here.
The cash rate has been increased substantially in a short period of time. Reflecting this, the Board decided to increase the cash rate by 25 basis points this month as it assesses the outlook for inflation and economic growth in Australia.
This reminds me of a song by The Specials.
You’ve done too much,Much too youngNow you’re married with a sonWhen you should be having fun with me
Also I look for contradictions and here is a clear one.
Today’s increase in interest rates will help achieve this goal and further increases are likely to be required over the period ahead.
If they really believe that why have the only raised by 0.25% when only a week or two ago the benchmark was 0.75%? We can continue with the contradictions as I note they have added this bit.
One source of uncertainty is the outlook for the global economy, which has deteriorated recently.