Yesterday we heard quite a bit from policymakers at the Bank of England. But before we get to it the economic world it faces has changed in a couple of important respects. One I pointed out on Twitter in the morning.
The UK ten-year yield has fallen below 3% this morning as UK borrowing costs continue to tumble…
So the “Black Hole” in UK public finances if it ever existed is now smaller. Also a subject which was in the news has seen some radio silence. For out purposes if we switch to the fifty-year yield at 2.84% we can borrow much more cheaply. Quite a few castles in the sky have crumbled which is probably why we are not hearing much. It is taking its time to feed into mortgage rates but it is beginning.
Mortgage rates on five-year fixed deals have dipped below 6 per cent for the first time in nearly two months…….The average rate on a five-year fixed-rate mortgage fell to 5.95 per cent on Tuesday, the lowest level since early October, according to data provider Moneyfacts. ( Financial Times).
As ever the declines come more slowly than the rises but more have happened since Tuesday so it is in play now. On this road we see something else which is really rather awkward for those who claimed that the Bank of England lost £65 billion when it intervened in the UK Gilt market as long-dated yields soared. Its £19.3 billion holding is on quite a nice profit as we stand and they start selling next week.
Next up is quite a change for the UK Pound.
GBP through 1.21 ( @CNBCJou )
This is really rather different to the panic around US $1.03 which was rather short lasting as we have seen a change in the strength of the US Dollar. The move if sustained will help in bringing inflation down as we have to pay less for commodities and especially in an energy crisis oil and gas.There is an old Bank of England rule of thumb for this and it suggests that the equivalent tightening of monetary policy is of the order of a 1.25% increase in Bank Rate.
Speeches
On Wednesday Chief Economist Huw Pill spoke to the Institute of Directors and got himself in rather a tangle again.
By the autumn of 2021, the need to start tightening the monetary policy stance was becoming more evident as those new inflationary shocks mounted.
So evident in fact he did nothing about it! Then we got this.
Behind the labour market tightness lies a decline in participation rates among the working age population, particularly those in the 50-65 age group………rising inactivity among the working age population represents an adverse supply shock, which adds to the difficult shorter-term trade-offs facing monetary policy.
This is an issue we have looked at and Huw wants to use it as an excuse for failed monetary policy but he hit trouble the very next morning.
Overall, net migration continued to add to the UK population in the YE June 2022, with an estimated 504,000 more people arriving long-term to the UK than departing. ( Office for National Statistics)
As you can see the potential labour supply situation was looking rather different and Huw yet again was in a tangle.
Bank of England Watchers Conference
Here Sir David Ramsden spoke although he prefers to be called Dave. He opened with something of a tale of failure.
Inflation is now expected to peak at 10.9% in 2022Q4,
over three times higher than was forecast only a year ago,
Actually it has already reached 11.1% but I guess Dave has been playing with his set of economic models again. Also why should anyone take much note of a body which has just been so wrong?
before falling sharply from the middle of 2023, to well below target by 2024Q4.
After all they are confessing to have been completely wrong about economic growth as well.
With the economy already likely to be in a recession which is forecast to be prolonged, GDP growth is negative in the year to 2023Q4 and 2024Q4, to 7.5 per cent below what was forecast a year ago.
Just to complete the set they were also completely wrong about the labour market.
Despite much weaker growth, unemployment looks likely to be lower in 2022Q4 than was forecast a year ago
and wage growth is forecast to be much higher, 5 ¾% compared with 1 ¼%.
As the World Cup is in we can look at this in the light of a football manager any of whom would have been sacked ages ago for such performances. But it is an other worldly place highlighted by the fact that Dave is the Bank of England “markets man” despite having zero experience of working in one.
He thinks he is looking decisive here but he is merely illustrating my point that making larger increases later is a signal of failure.
As the MPC has become increasingly focused on the prospect of more persistence in inflation, it has tightened policy more sharply. In the five meetings from December 2021 to June 2022, Bank rate was increased by 1.15 percentage points in total. In the three meetings from August 2022 to November 2022 Bank rate has been increased by a cumulative 1.75 percentage points.
Then we get to something that makes me wonder if he has been reading me?
We have increased Bank Rate very rapidly over the last year and on past experience a change in interest
rates has its peak impact on inflation only after around 18-24 months. But it is possible that the increased proportion of households on fixed rate mortgages means the full effect of policy takes longer to come through and/or is larger when it does, such that inflation comes down more quickly through 2023.
Actually there is one divergence and that comes from his maths as the move is more likely in early 2024. It is quite a critique of the Bank of England and central banks generally.
What next? He wants us to think he is keen on more.
then I expect that further increases in Bank rate are going to be required to ensure a sustainable return of inflation
to target. Considerable uncertainties remain around the outlook and if the outlook suggests more persistent inflationary pressures then I will continue to vote to respond forcefully.
The next bit can be taken two ways. The first is that he is at least being honest and the second is that he wanted to pre-empt someone else pointing it out. Here he is from February.
“I do not envisage Bank rate rising to anything
like its pre-2007 level of 5%, let alone to the kind of levels we used to see before the MPC was formed in 1997”
Comment
The first issue is why was I not at a Bank of England “watchers” conference? Easy as I was not invited. Switching to policy there is a simple logical problem. If you tell people about a “prolonged recession” and revise your GDP growth path down by 7.5% then you are going to see bond markets look ahead to future interest-rate cuts. All the rhetoric in the world will not change that. Putting it another way the ten-year yield was the same as Bank Rate yesterday morning meaning they expect that the interest-rate rise in December ( 0.5%?) and any subsequent ones will be reversed.
Markets ebb and flow and the ten-year yield is 3.1% as I type this. But the Bank of England faces an issue created by its own forecast of a severe recession which was created by its assumption of a 5.25% Bank Rate.
Actually the real player is a combination of energy prices and what the weather does this winter.