How unreliable can a Bank of England Governor be?

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by Shaun Richards

Last week posed several questions for the Bank of England. The good side was the better numbers for retail sales which we looked at on Friday.That added to the hope that we are not back to pre pandemic levels for the economy because as of the numbers for September we were 0.6% below. On the other side of the coin was the issue of inflation and the fact that on the official measure it was more than double the target and over 4% with the RPI telling us it is 6%. So from those points of view it was no surprise to see Governor Andrew Bailey in the Sunday Times over the weekend. It was also no surprise to see that it took him a long time to mention inflation, but let us go straight to it.

He pointed out that markets had not seemed to budge in response to language about “increasing inflationary pressures” in the Bank’s monthly reports from May onwards. “I’ve got to say that many of us were puzzled,” he said. “Look at ten-year government bond yields over the summer — there was not much reaction going on. So as we saw the inflationary pressures growing, from the point of view of guidance on the framework of policy, I felt that I had to. But it was a conditional statement.

As you can see he has included his Forward Misguidance from last month. But there is more misguidance because bond yields did rise but there was a large buyer in the market every week and that was Governor Bailey himself. To quote a market that he has deliberately influenced is really rather poor. Also the rising inflationary pressure is wrong too as the Bank of England first told people there was going to be only minor inflation and then used the now infamous word “Transitory” and claimed it would not be around for long. So you could argue bond yields remained low via a combination of believing the Bank of England and its buying which is rather different to what he said.

The Unreliable Boyfriend.

Never believe anything until it is officially denied is in play here.

But to be clear, at no point did I, or anybody, say, ‘And by the way, we’re going to raise interest rates in November.’ ”

There is also an element of a non-denial here because central bankers speak in a coded language so he was never going to say that although he predecessor got rather close back in the day. The response below is very damning.

Wealth manager Netwealth’s Gerard Lyons, Boris Johnson’s former economic adviser, said the process had been “a complete farce”: “It basically led to unnecessary volatility in interest rate and currency markets, and it also led to higher mortgage rates being passed on to a number of buyers.”

There is an irony in that critique and an own goal as we know the mortgage market is a Bank of England priority.

“I don’t buy it,” he said of the unreliable boyfriend tag. “Look, you’ve got to have a sense of humour in this job. It’s an obvious cheap shot. But I don’t buy it at all.”

Actually it was those who were misled who needed a sense of humour as did those with overdrafts when he intervened in that market. For those unaware when he was head of the Financial Conduct Authority he tried to reduce overdraft interest-rates and in fact doubled many of them. If you look back on the Bank of England quoted rate it was 21% and after the reduction effort was 34% and even worse this happened as he had become the Bank’s Governor and was cutting official interest-rates.

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Reality versus Expectations 

We have looked at the issue of reality versus central bank models. Let me start with reality.

 even while upping its peak inflation forecast to 5 per cent for next April — more than double the Bank’s 2 per cent target.

That is a forecast but you see much of that is nailed in now via the behaviour of energy prices and the UK domestic energy price cap. Whereas our inflation battling Governor prefers this.

Let’s be clear — if we see, particularly in terms of medium-term inflation expectations, that’s increasing, we’ll have to act. There’s no question.

That is rather different to what the Bank’s own survey told us in September.

Question 2c: Asked about expectations of inflation in the longer term, say in five years’ time, respondents gave a median answer of 3.0%, up from 2.7% in May 2021.

Economic Growth

There was a revealing admission here.

Bailey said that after “all sorts of adjustments”, the economy was still about 1.7 percentage points below its pre-Covid level, “but if you actually then allow for the growth of the public sector … the public sector is contributing about one percentage point in GDP terms”.

As you can see he is now cherry-picking the GDP numbers as well and there are two facets to this.

Bailey suggested that some of this recruitment may have been related to the launch of schemes such as NHS Test and Trace and the Covid vaccination programme, although he said the exact nature of the roles being created was “quite elusive”. He said the public sector was contributing about one percentage point to GDP.

Okay so he does not want to count them which is interesting as it opens up another flank. But there is more.

Andrew Bailey said the state was, in effect, competing against the recovering private sector in a tight labour market by hiring extra workers. “Public-sector employment has increased – we reckon it’s about 200,000 to 300,000” he said. “The shortfall in employment in consumer-facing services industries, which are looking for active labour, is not far off the same number … So if you think about competition in the labour market, the public sector has increased.”

It is revealing that he thinks the numbers can only be looked at in round hundred thousands. But it is also somewhat dismissive of worker’s skills suggesting they can go from one job to another in a way which is often not true these days. But if his point is true then there is another reason to raise interest-rates according to his thinking as it would raise wages.

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Comment

There is a clear signal here from Governor Bailey and it is that he wants to get the idea that the economy still needs help.

Raising rates even slightly could crimp growth without making a real dent in inflation

He has placed the growth issue via the sort of cherry-picking usually only applied to inflation numbers. If we are going to exclude some part’s of the public-sector why not others? Him for example as he recent contribution has been to mislead investors and the wider public. The cherry-picking itself is bizarre as we have one success ( vaccines) lumped in with something much more mixed ( Test and Trace). This is in spite of the fact that last week’s news was good overall with this to add to the retail sales numbers.

Despite the end of the furlough scheme, the number of payrolled employees rose by 160,000 to 29.3 million between September and October.

There is a slightly chilling postscript to this.

And C, however, the concern for us is what they classically call ‘second-round effects’, particularly in wage bargaining and the labour market … If the economy evolves in the way the forecasts and reports suggest, we’ll have to raise rates.

So if your wages rise to match inflation he will raise rates to make you worse off? That is odd or putting it another way why deal with the cause when you can deal with the effect. As I regularly point out monetary policy needs to look forwards because it takes time for the economy to respond to it whereas this Governor in his own words looks like a tail gunner blazing away at the clouds we have passed.

In a world where restrictions are spreading again in Europe and especially Austria a December Bank Rate rise looks even less likely. Our valiant Governor looks set to continue his record of being someone who has failed upwards.After all his anti-inflation rhetoric contrasts with the extra £3.45 billion of UK bonds he will buy this week alone.

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