The Bank of England has given us a bitter Pill to swallow

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by Shaun Richards

Yesterday we heard for the first time from the new Chief Economist of the Bank of England Hew Pill as his written answers to the Treasury Select Committee were released. I suppose it was one of the certainties of modern life that he would be an alumnus of the Vampire Squid, otherwise known as Goldman Sachs. Who knew that Bank of England independence would end up being defined in my financial lexicon for these times as a combination of Goldman Sachs and HM Treasury? This particularly matters because both institutions invariably produce people with a Stepford Wives theme. As to whether anyone else who applies feels a bit cheated I am not sure but it feels like that were put through the motions after the decision had been made. Also in the circumstances I am not entirely sure it is wise to bring a European specialist who has spent a fair bit of time at the ECB in.

Indeed he is still a shareholder.

As a result of my previous employment, I continue to hold shares in Goldman Sachs & Co., which are either unvested and/or restricted as a result of regulatory rules imposed by the PRA or additional restrictions imposed by GS.

Clever of them to tie him in.

The bulk of this holding will become unrestricted in January 2022, and the unwind will be completed in January 2023.

As ever it comes with promises of the opposite.You see only someone with a past career at the Bank of England, ECB and Goldman Sachs would not laugh at this.

Part of the solution lies in exposing the Bank’s work to external critique and inviting those with valuable
and constructive alternative views to offer their distinct perspective.

Perhaps it is his insider nature that also meant he did not realise the impact of moving in this direction,

Thanks to the efforts of Bank staff over the past year, negative interest rates are now a live instrument of
monetary policy in the UK.

“A live instrument”? This came to the attention of those outside the UK as well who were curious about what he thought he was doing here? They were thinking of the timing but as to the reality in the Euro area only an ECB insider could claim this.

On my reading, those concerns under-appreciated the ‘general equilibrium’ benefits of negative rates in
boosting confidence, sustaining demand and improving credit quality. These factors have more than offset
any negative impact on bank balance sheets coming from a squeezed on net interest margins.

Okay so how negative? The emphasis is mine.

(1) Negative interest rates are both feasible and likely to
ease monetary conditions. They are thus a helpful addition to the monetary policy toolkit, create additional
policy room, and help to address concerns that central banks may be running out of ammunition to fight
disinflationary pressures. But (2) negative interest rates are no panacea. In the current institutional setting,
there are limits to how far they can fall: probably 50 or 100bp of additional reduction in the Bank rate is
now possible

So in spite of the 6 years or so experience of the ECB and the Euro area and the evidence provided by it he still claims negative interest-rates work. From that world it is then no great surprise that he thinks interest-rates could fall towards -1% ( literally -0.9%) because via the TLTROs the ECB has offered -1% to the banks.

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Actually there is something which leaps off the page even more as there are some weasel words in there, “In the current institutional setting”, which means this.

These conclusions assume we remain within the current institutional setting where traditional banknotes
continue to exist.

He is already thinking of a world where cash is not only no longer king but extinct.

But at a time when analysis of the introduction of central
bank digital currencies (CBDCs) is underway, envisaging an environment where banknotes are eliminated
and CBDCs pay negative interest rates may create scope for much more negative interest rates.

The emphasis is mine as we mull the IMF paper which suggested this was a route to interest-rates of the order of -3% which would be a bitter pill to swallow for savers.

I do not often think this way as it has its flaws. But with thoughts like that at central banks you can see why Bitcoin has seen some surges this week.

A Space Oddity

The issue of inflation which he is supposed to target creates a litany of problems for our Pill.  For example the Bank has got it wrong again.

Taking the August MPR as the benchmark, over recent months inflation has surprised to the upside,

Actually it has surprised the Bank pretty much all year and has meant policy has been set incorrectly a subject he is no doubt desperate to swerve. This meant that he found himself in the central banking equivalent of holding a hand grenade with the pin out as what does this do to the “Transitory” claims?

Moreover, the rise in wholesale gas prices threatens to raise retail energy costs next year, sustaining CPI inflation rates above 4% into 2022 Q2.

He even found himself forced to admit that the road below was possible.

or otherwise risk that inflation and inflation expectations shift to a new higher equilibrium inconsistent with the MPC’s remit owing to self sustaining second round effects in inflation associated with rising pricing power for firms and/or a wage/price spiral.

Thus inflation has done this.

You took me, oh (higher and higher, baby)
It’s a livin’ thing ( ELO)

At best UK inflation will be much higher than the Bank of England claimed for much longer than it claimed. This is a type one failure for an inflation targeting central bank. But the bitter Pill here is that its new Chief Economist thought it would be wise to get the issue of negative interest-rates on the agenda. As an insider he thought it would be clever to issue a 16 page dissertation which would cover him against nearly all angles.It was the rest of us he forgot perhaps following the Goldman Sachs line of thinking of others as “Muppets”

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House Prices

Well played to the Treasury Select Committee for raising the issue as the inflation target ignores them. This gets firmly licked into the long grass.

Including a more prominent role for the housing market is similarly important. While efforts to build these new models proceed, continuing to ensure that asset pricing, housing market developments, and the evolution of mortgage borrowing and its pricing are monitored closely and filtered into the overall assessment of the economic situation remains crucial.

The system of ignoring house prices ( which are in the previously targeted RPI)  began in 2003 and even now we only have “efforts to build”. The past is nit his fault but the present and future are.


Our first lesson is that the Bank of England seems to be conducting its recruitment from the banks of Goldman Sachs alumni if no-one is available at HM Treasury. So much for the claimed diversity! The idea that he can remain a shareholder is an absolute disgrace but central banking standards have sadly been limboing for some time now. As to policy he will cut interest-rates into negative territory in the next recession and has no real interest in or intention of actually targeting inflation which is now merely a PR exercise.

Meanwhile there was a section which shows that QE bond buying is now a permanent tool they feel they cannot do without.

By contrast, if asset purchases are intended to support market functioning in a systemically pivotal market
such as that for sovereign debt, then a more flexible and opportunistic approach focused on the flow of
asset purchases may be more appropriate. Given the importance of financial stability considerations in
assessing the effectiveness of such purchases, the FPC may wish or need to be involved in their governance
(even if the monetary implications of the purchases continue to entail a prominent role for the MPC).

So the even more unaccountable FPC will get a role although there is a nuance as quite a few members remain the same. But the underlying theme is that QE is a permanent feature and should it end this year the next question is when will it start again?

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