The Bank of England is in quite a pickle of its own making

by Shaun Richards

This morning has brought us up to date on the UK economy at the opening of the year and it is good news overall.

UK gross domestic product (GDP) is estimated to have increased by an unrevised 0.8% in Quarter 1 (Jan to Mar) 2022.

The level of real GDP remains 0.7% above where it was pre-coronavirus (COVID-19) at Quarter 4 (Oct to Dec) 2019

I say good news because if they were going to be revised it was only going to be one way as we look at how 2022 has developed. Also on the optimistic side is this on our energy exposure from McKinsey & Company.

So the energy crisis may well impact us less than other economies.

But an issue I have been highlighting for some time was also on the move in the first quarter.

Real Household Disposable Income (RHDI) fell by 0.2% this quarter – nominal household gross disposable income grew but was offset by quarterly household inflation; this is the fourth consecutive quarter of real negative growth in disposable income.

That is a consequence of the cost of living crisis which has got worse since then meaning that the going is getting tougher for the UK economy.

Bank of England Governor Andrew Bailey

Governor Bailey spoke at the ECB conference in Sintra yesterday. According to the Bank of England house journal he wanted to give the impression of being a born-again inflation fighter.

Speaking with other central bankers at a European Central Bank conference in Sintra, Portugal, Andrew Bailey said the BoE needed the option of half-point interest rate rises to address inflation but did not commit to further increases.
But he was adamant that the BoE would curb rapidly rising prices even if that meant pain for households. “The key thing for us is to bring inflation back down to target and that is what we will do,” Bailey said. ( Financial Times)

Rather curiously in the light of GDP figures that show us outperforming our fears there was also this.

“I think the UK economy is probably weakening rather earlier and somewhat more than others,” Bailey said, attributing the problems to the energy price shock that all European economies faced alongside a UK problem of people dropping out of the labour market. ( FT)

Indeed his view gets even odder when we note that the UK is less exposed on the energy front to others. Maybe no-one has told the Governor yet, who does not seem to be checking the news flow either.

German energy giant Uniper is discussing a possible bailout from Berlin after Russia curbed natural gas deliveries, forcing the utility to buy fuel in the spot market at higher prices ( @JavierBlas)

Considering his past track record on forecasting inflation more than a few will see this as being potentially hopeful.

He said inflation would persist at a higher level in the UK than elsewhere, lengthening the pain felt by households across Britain.
“Unfortunately, there is going to be a further step up in UK inflation later this year because that’s a product of the way the energy price cap interacts with the energy prices we have observed over the last few months,” Bailey said.

We only need to look across the Channel to see a country that has an energy system in a mess ( I mean a bigger mess than ours). Its nukes are suffering from neglect and maintenance problems.

EDF lowered its 2022 target to 280-300 TWh from 295-315 TWh. That’s the 3rd cut this year  2022 atomic output will be lowest in 30 years ( @SStapcyznski )

So they have been importing power from us in the UK ( although not much today because we have so little wind) and presumably we are getting a good price for it. So costs are high but the government is simply kicking the can.

France’s energy price cap has been extended to the end of this year, Prime Minister Élisabeth Borne announced yesterday (June 23).

The bouclier tarifaire, first introduced in November last year, froze gas prices at October 2021 rates and also limited electricity prices from increasing by more than 4%. The measure was supposed to end on June 30 but has now been extended.  ( ConnexionFrance)

It is an expensive can too.

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Brussels-based think tank Bruegel estimates that France will spend €38billion in measures designed to counter rising prices.  ( ConnexionFrance )

At some point there will have to be a rationalisation in France where inflation is lower now ( 6.5% in June on the Euro area measure) but at some point will have to catch up unless they intend to just keep borrowing and adding to their debt.

There was also something of an echo from the past in the words of Governor Bailey.

“I would agree with that,” he said referring to the markets properly pricing in the risk that rates would have to rise more than expected. ( FT)

Not quite the same as the “sooner than markets expect” from Governor Carney but in response to something much larger than he was thinking.

Financial markets expect rates to rise further to around 3 per cent in a year’s time. ( FT)

Actually with the UK ten-year yield at 2.35% I think they should say some financial markets.

How did she get the job?

We got confirmation yesterday.

LONDON, June 29 (Reuters) – The Bank of England should move very gradually to tighten monetary policy because the economy now appears to be slowing faster than previously thought, incoming BoE policymaker Swati Dhingra said on Wednesday.

This is rather like in Yes Minister when Sir Humphrey Appleby tells us you do not seek to influence people, rather you appoint those who do not need influencing.

“Newer data is starting to show that possibly a slowdown has become much more imminent than we thought before,” she said.

Britain’s main measure of consumer sentiment, from GfK, sank to its lowest level since at least 1974 in June as households feared the impact of surging inflation.

How long before she votes for an interest-rate cut?


We can step back to May last year for a perspective on this. On the 13th the Guardian reported this.

The governor of the Bank of England has sought to calm financial market fears over rising inflation but has exposed a policy rift with Threadneedle Street’s outgoing chief economist, Andy Haldane.

The day after Haldane used a newspaper article to warn of the need to prevent the “inflation genie” getting out of the bottle, Andrew Bailey said he thought upward price pressures would prove temporary.

He was of course completely wrong. In fact he doubled-down.

“So the really big question is, is [higher inflation] going to persist or not? Our view is that on the basis of what we’re seeing so far, we don’t think it is.”

So I would not be taking too much notice of his forecasts.

Still there was some better news from the perspective of the Governor this morning. Perhaps his mind may still be suffering from the after effects of the fine ECB wine cellar. But he should still be able to manage a smile at this.

“UK annual house price growth slowed modestly to 10.7% in June, from 11.2% in May. Prices rose by 0.3% month-on-month, after taking account of seasonal effects, the 11th consecutive monthly increase.

“The price of a typical UK home climbed to a new record high of £271,613, with average prices increasing by over £26,000 in the past year. ( The Nationwide )


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