The Bank of England is lost at sea

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by Shaun Richards

Today the Bank of England makes its policy announcement. I would say that some of you may be reading this after the event but in a way I am too as it voted last night. It prefers bureaucratic ease to the risk of the decision leaking. Speaking of last night we saw a feature of the times which was not a little bizarre. As I expected the US Federal Reserve did nothing except pull markets along following the same piece of cheese which keeps disappearing.

Powell: Taper Announcement Could Come as Soon as the Next FOMC Meeting ( @DeltaOne )

Actually it was supposed to be this one and then previously at Jackson Hole in August. This does not seem anything like convincing to me.

“While no decisions were made, participants generally viewed that so long as the recovery remains on track, a gradual tapering process that concludes around the middle of next year is likely to be appropriate,” ( Chair Powell)

The biazarre came as discussions began about the Tapering which has not started as as you can see no decision has been made will be over by the middle of next year so interest-rates can rise. Apparently that is “hawkish”

On that scale I wonder what they make of this from Brazil.

Taking into account the baseline scenario, the balance of risks, and the broad array of available information, the Copom unanimously decided to increase the Selic rate by 1.00 p.p. to 6.25% p.a.

Even worse is the rationale.

The Committee judges that this decision reflects its baseline scenario for prospective inflation

So they are worried about inflation and are responding whilst Chair Powell is “hawkish” by doing nothing but will definitely maybe do something one day.

More pain for Chair Powell and his merry share and bond trading crew has come from Norway this morning.

Norges Bank’s Monetary Policy and Financial Stability Committee has unanimously decided to raise the policy rate from zero percent to 0.25 percent.

“A normalising economy now suggests that it is appropriate to begin a gradual normalisation of the policy rate,” says Governor Øystein Olsen.

The Bank of England

This will be struggling with the same issues with a UK twist. That is that with inflation above 3% on the official CPI measure an explanatory letter to the Chancellor Rishi Sunak is due today. Except how to write it without saying we did it? That issue is reinforced by the present gas price crisis where there will already be an impact from the price rises announced for October 1st but it now looks increasingly likely there will be another one by the spring.

Gas and electricity bills accounted for 7.5% and 7.3% of all spending by households in the two lowest income deciles, compared with 3.1% and 2.7% for households in the two highest deciles. ( Reuters)

In terms of the CPI inflation measure domestic fuel has a weight of 2.6% so it poses a challenge to the “temporary” inflation theme as next year’s expected rise nudges the number then higher. The price of a barrel of Brent Crude being above US $76 per barrel is not helping much either.

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Interest-Rates

Earlier this month Governor Andrew Bailey started his public relations effort on interest-rates.

LONDON, Sept 8 (Reuters) – Bank of England policymakers were split evenly last month between those who felt the minimum conditions for considering an interest rate hike had been met and those who thought the recovery was not strong enough, Governor Andrew Bailey said.

An odd statement so let us look further.

“Let me condition this by the fact that it was an unusual meeting because there were only eight members of the committee – so it actually was four-all,” Bailey told the Treasury Committee in the lower house of parliament.

At a time when telling lies in Parliament is an issue let us take a moment to remind ourselves of the actual vote.

The Chair invited the Committee to vote on the propositions that:

Bank Rate should be maintained at 0.1%;

 

The Committee voted unanimously in favour

So his 4-4 was in fact 8-0 as they were a person short due to forgetting to appoint a new Chief Economist in time. Thus he has misled Parliament and the unwary with the get-out being his use of “basic minimum” which is in fact meaningless. He is doing this in response to this.

Perhaps, Andrew, I could start with you. In May, the
Bank forecast inflation at 2.5% by the end of this year. As you know, now the forecast is 4%, which is a very significant uplift of 1.5%; I think it is the largest CPI uplift to a forecast that there has been, and almost half as
large again as the second largest uplift.

It seems that Parliament may be finally realising that the Bank of England cannot forecast its way out of a paper bag. I have a little sympathy for them as of course they also have to listen to the even worse forecasting of the Office for Budget Responsibility. But that fades as we recall who appoints these people to these roles!

QE

The evidence to Parliament took a curious turn as the absent-minded professor lived up to his name.

I am often puzzled by the claim about asset prices and QE.

In the case of Dr.Broadbent we could have stopped after the first 4 words. But there was more to come.

I am happy to write to the Committee and make these points in more detail. In real terms, UK equity prices are still a long, long way below their peaks of the 1990s; they have not been strong. House prices have gone up a lot over
the last year, for reasons related to Covid, but before that had risen for 15 years basically in line with wages. The really rapid growth in house prices was before that; it was in the years around the millennium.

There is so much that is wrong here. For example we look at equity prices in real terms but house prices in nominal ones. Also even by his standards this really is a shocking lack of awareness of his own actions.

House prices have gone up a lot over
the last year, for reasons related to Covid

So the economic collapse pushed house prices higher on its own Ben? He has forgotten this from Bank Underground from the 6th September 2019.

We find that the rise in real house prices since 2000 can be explained almost entirely by lower interest rates.

So via the interest-rate cuts and QE bond buying that Ben has voted for.

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The equity market point is more intriguing although care is needed as the FTSE 100 is international and represents mining and other stocks which have not done as well as others. But even if you switch to domestic stocks there is some truth to this. Although in a familiar swerve he has forgotten one of his favourite words “counterfactual” as they may have fallen otherwise. Also as equities pat dividends they should be included.

Comment

As you can see the Bank of England is currently becalmed with only “open mouth operations” available to it. The interest-rate weapon has been weakened by several developments. One is the move the fixed-rate mortgages and the other is the fact that the Bank of England QE book is effectively financed at Bank Rate so they are not keen to raise it. Also any rise in bond yields will be expensive for the government which is already facing more debt costs due to the rise in inflation it and the Bank of England have worked together to create.

Oh, what a tangled web we weave, when first we practice to deceive! ( Sir Walter Scott )

Added to all of this there is the trend towards economic slowing that we have been observing. Whilst I have no great faith in the Markit PMI the Bank of England does ( Ben Broadbent being especially enthusiastic) and that told us this earlier.

“While there are clear signs that demand is cooling since
peaking in the second quarter, the survey also points to
business activity being increasingly constrained by shortages
of materials and labour, most notably in the manufacturing
sector but also in some services firms.”

Then there is the large tax rise on its way ( which looks a bigger mistake by the day) and the energy price rises and the end of the top-up to Universal Credit. Much more of that and they will be thinking of easing again…..

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