The Bank of England plans to take centre stage

by Shaun Richards

It was kind of Bank of England Governor Andrew Bailey to make me look tight so quickly. It was only on Friday that I pointed out the corruption issues at central banks and he then dashed off to give a speech with policy directions and implications at a private gathering over the weekend. If that was not bad enough the words are not on the Bank of England website so that those who pay his salary can peruse and digest them for themselves. He seems to have a tin ear for his public responsibilities which is especially rich when you consider that the rhetoric of central bankers in recent years has been about getting the message to the ordinary person. In reality that is just hot air that would be welcome in the energy crisis.

What was said?

Here are his words provided by what is so often in effect the Bank of England house journal otherwise known as the Financial Times.

The governor of the Bank of England warned on Sunday that it “will have to act” to curb inflationary pressure, making no attempt to contradict financial market moves that have priced in the first interest rate increase before the end of the year.

We have looked at the development where financial markets have been predicting an interest-rate move via the way that UK government bonds yields have moved. The ten-year benchmark was around 0.5% in early August but is more like 1.1% now.Although care is needed because it would be a small interest-rate change. If we look at an old stomping ground of mine ( literally when I worked on the LIFFE floor) we see that as I type this the December future has moved -0.13 to 99.51 this morning. What that means is that a move to a Bank Rate of 0.25% is being priced in. If you do the maths there is another 0.24% as well in that price but that is telling us another rise is expected afterwards.

Inflation Troubles

Actually even if we got the full move in the price above which we can round to 0.5% or 0.4% higher what would it do to this. The emphasis is mine.

Speaking from home to the G30 group of central bankers, Andrew Bailey said inflation in the UK had already risen and would rise further in ways that would warrant action to tame medium-term inflation. Ramping up the rhetoric ahead of the Budget and the BoE’s next forecast on November 4, he signalled that his concerns on inflation during the current energy crisis had increased. The governor stuck by his long-held view that the rise in inflation, which jumped to 3.2 per cent in August, would ultimately be “temporary” but noted that large price increases would last well into next year. “The energy story means [the period of high inflation] will last longer,” he said. ( FT)

The rise in inflation has already reached a level at which he has to write an explanatory letter to the Chancellor and will go above 4% according to the Bank of England. A 0.4% Bank Rate rise will do what exactly? Compared to the inflation rise it will be miniscule so “will have to act” sounds dramatic but in practice seems just fiddling at the margins.

Also there is the elephant in the room which is the use of the word “temporary” which is panning out exactly as I have predicted. It was simply to provide cover for their unwillingness to do anything about the coming inflation storm. Or as I note this comment to the FT.

Three short weeks ago inflation was temporary. Now it’s still temporary but could last well in to next year.  ( Chris Lancashire)

The truth is that they got both the scale and the length of the inflation rise wrong. They are already shuffling the pack on the length of the episode and frankly it looks set to go above 5% on their CPI target and 6% on the RPI. The exact numbers are being bounced around at the moment by the energy crisis which in an irony has softened as this week has started in response partly to hints from gas producer Russia, partly due to the weather (wind) forecast for Europe this week and much more grimly due to demand destruction. What I mean by that is that more and more industrial producers in Europe are finding it uneconomic to produce at these prices and are reducing or closing production. This is of course very bad news and may also be yet another signal that Governor Bailey has a bad sense of timing.

As to timing why not strike whilst the iron is hot? Otherwise known as the November meeting?

Few think the BoE will move as early as the November meeting because most of the committee have said they want to wait until there was good evidence on the effect of ending the furlough scheme before taking action.

Actually central banks usually try to avoid a Grinch type message for Christmas and I wonder if they have not thought of that yet?

The Blame Game

Rather than admit to a mistake the Governor is blaming us.

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Bailey said one of the main reasons for the rise in inflation was that consumers were still demanding goods rather than shifting to spending money on services, and this rise in demand combined with supply chain problems was leading to higher prices.

Sounds much better than saying he was wrong (again) to him at least. As we see so often some researchers have been sent off to dress it all up in some theory.

He added that these changes in consumption patterns were combining with a decline in the number of people willing and able to work because younger people were staying in education at the same time as the retirement rate rising. “I do have concerns about labour supply growth,” he said.

“Concerns” is a very useful word as it can cover nearly everything.


This is quite a mess. I have argued previously that once the emergency was over then we should have ended the emergency policies. You could make a case for Bank Rate being 0.5% now or 0.75%. Also we would not be doing another £1.15 billion of bond purchases this afternoon which after yesterday’s words from the Governor just looks plain stupid. Neither move would be a big factor in energy prices but we would at least stop making the inflation situation worse. Bananarama and the Fun Boy Three were correct.

It ain’t what you do, it’s the time that you do it
It ain’t what you do, it’s the time that you do it
It ain’t what you do, it’s the time that you do it
And that’s what gets results

It is back to the timing issue where the Bank of England would in cricketing terms be on the front foot and let’s face it if we cannot cope with interest-rate moves on that scale we are really in a mess.

Next comes the issue that we have heard this before. Remember Governor Carney at Mansion House in the summer of 2014?

There’s already great speculation about the exact timing of the first rate hike and this decision is becoming more balanced.

It could happen sooner than markets currently expect.

His next move was a CUT!

There is a theoretical underpinning to this and was highlighted late last week by new policymaker Catherine Mann.

LONDON (Reuters) – The Bank of England can hold off on raising interest rates because investors are doing some of the central bank’s work for it by betting on tighter monetary policy in Britain and the United States, BoE interest rate-setter Catherine Mann said………….”This means that there’s a lot of endogenous tightening of financial conditions already in train in the UK. That means that I can wait on active tightening through a Bank Rate rise,” she added.

So what has happened this morning is doing her job for her, at least in her view. This is why she was recently selected of course.

There is a bigger catch however and it too in more timing embarrassment for the Governor also came this morning.

“Since entering the third quarter, domestic and overseas risks and challenges have increased,” Fu Linghui, spokesperson for the National Bureau of Statistics, said at a press conference Monday in Mandarin, according to a CNBC translation.

We have exactly the same problems in motion,although so far the cuts have been via price rather than power cuts.

Many factories had to stop production in late September as a surge in the price of coal and a shortage of electricity prompted local authorities to abruptly cut off power. The central government has since emphasized it will boost coal supply and ensure the availability of electricity.

So should we see an interest-rate rise in December they could easily be cutting by March.



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