Is the Monetary Policy Committee still a democracy or has it become a dictatorship?

19th February 2014 by The Harried House Hunter

In recent times the UK Office for National Statistics has developed the habit of releasing economic data virtually on top of each other with little delay. Yesterday we had a whole sequence of inflation numbers -which used to be on different days- and today we move to the labour market. Actually this reminds me of a piece of past economic theory called the Phillips curve.

In economics, the Phillips curve is a historical inverse relationship between the rate of unemployment and the rate of inflation in an economy. Stated simply, lower unemployment in an economy is correlated with a higher rate of inflation.

Sadly for William Phillips this is not the situation in the UK. Only yesterday we observed that inflation has been falling since last summer and if we move to unemployment we note that the unemployment rate  has fallen as well from 7.8% to 7.2% over the past year. I hope that his fellow Kiwis will forgive me for pointing this out and anyway cricket fans over there will still probably be basking in the glow of Brendon McCullum’s triple century.

The Bank of England steps in

This is a long way from the first time that the original Phillips curve theory has been challenged by the evidence. Back when I was a student the rational expectations revolution combined with the work of Milton Friedman gave us a long-run and short-run Phillips curve. Here we find something else which will be part of the UK economic releases today as the Bank of England has joined the economics data rush with its minutes. This is relevant to the debate because it has been estimating the medium-term equilibrium rate of unemployment which implies a Phillips curve style of analysis.

The latest inflation report told us this about the unemployment rate.

medium-term equilibrium rate of 6%–6½%.

As an aside there is an obvious contradiction here between that number and the 7% unemployment rate used as the original Forward Guidance threshold is there not? Not only did they choose the wrong target they got the level wrong too! Now spot the change from last August.

That suggests a medium-term equilibrium rate of around 6½%

So it has been nudged lower in a way that they may have hoped would not be spotted. How far could it go? Well there is this.

Evidence on job-finding rates and job creation suggests that the natural rate was just over 5% in the run-up to the 2008/09 recession . Since then, it is likely to have been broadly flat.

I would not be surprised to see the medium-term equilibrium unemployment rate described as 6% in this August’s inflation report. Or to put it another way from the latest inflation report.

There is uncertainty about the medium-term equilibrium unemployment rate.

Well downwards uncertainty anyway…..

Today’s data

This is being presented as a surprise but readers of the comments section here will be aware of the argument that the sequence of very good unemployment rate numbers had overshot reality.

The unemployment rate for October to December 2013 was 7.2% of the economically active population, down 0.4 percentage points from July to September 2013.

Actually the single month of December was at 7.2% which means that next time around as the 7% of October drops out then January will have to be a particularly good reading to push the number lower.

As ever the forecasting department of the Bank of England was unable to miss the opportunity to be wrong. From only a week ago.

The headline LFS rate is projected to have remained at around 7.1% in December.

If they are continuing to define ‘around’ as being ‘below’ they did even worse.

What does this mean?

If we look to some of the other data we should be reassured that the trend here is still the unemployed’s friend.

There were 2.34 million unemployed people, down 125,000 from July to September 2013.

The employment rate for those aged from 16 to 64 for October to December 2013 was 72.1%, up 0.3 percentage points from July to September 2013. There were 30.15 million people in employment aged 16 and over, up 193,000 from July to September 2013.

Those who follow my theme that it is employment that is the driving force and leading indicator here will be cheered to learn that the employment rate rose to 72.3% in December.

So whilst the headline unemployment rate raises a concern the underlying picture remains good and we see another indicator of this below.

Total hours worked per week were 966.8 million for October to December 2013, up 4.0 million from July to September 2013 and up 18.9 million on a year earlier.

Let’s hear it for the girls

For October to December 2013, 67.2% of women aged from 16 to 64 were in work (the highest figure on record), up from 66.5% a year earlier and 65.4% two years earlier.

It would be going to far to say that the fairer sex is solely responsible for the UK economic recovery but they are certainly a powerful agent in it.

What about wages?

There was a possible hint of better times here too.

Between October to December 2012 and October to December 2013, total pay for employees in Great Britain rose by 1.1% while regular pay rose by 1.0%.

Only a smidgeon but upwards at least. If we look into the detail there was more room for optimism as the figure for total pay in December alone was 1.5%. However some care is needed as this was driven by an 8.1% rise in private-sector bonuses for that month. So whilst it was good that UK employers were shelling out for year end bonuses these of course by their very nature are likely to wither away in January.

Real wages continue to fall

We are being assaulted in the media by a barrage of assertions about real wage growth that some may already believe that they are rising. But sadly they are not. So far falling inflation has done much more for them than rising nominal wages. We have had a recovery for a while now and yet real wages are still falling at an annual rate of 0.8% if we use the official consumer inflation measure (CPI) and by 1.7% if we use the Retail Price Index.

Should the exchange rate of the pound continue to be strong then I expect some relief for real wages from further inflation falls. But so far the official figures are picking up only weak improvements in nominal wages. There would be food for thought indeed if this situation carried on and even sustained economic growth brings few real wage benefits.

It is perhaps too soon to declare an apocalyptic new era but it does feel that for a given economic reality real wages have shifted downwards and this phenomenon is being seen in plenty of places outside the borders of the UK as well as within it.

Is the Bank of England a dictatorship now?

The release of the monthly minutes was missing something.

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

  • Bank Rate should be maintained at 0.5%;
  • The Bank of England should maintain the stock of purchased assets financed by the issuance of central bank reserves at £375 billion.

Regarding Bank Rate, the Committee voted unanimously in favour of the proposition.

Regarding the stock of purchased assets, the Committee voted unanimously in favour of the proposition.

Under the era of Forward Guidance these were of course fait accomplis as we wonder what they actually do at each monthly meeting. Well they did not appear to be able to find the time to vote on Forward Guidance 2.0 did they? Perhaps the supine way in which the other eight members of the Monetary Policy Committee behave with regards to the introduction of Forward Guidance as they rushed forwards shouting “Eureka! Me too sir!” has made Mark Carney think that votes are unnecessary now.

Or perhaps policy is now longer made at the monthly MPC meetings which would be a downgrade for the (part-time) external members who might find themselves there on the wrong days. Oh and this implies a change in UK monetary structure and governance on the quiet.

Comment

If we look below the somewhat disappointing headline unemployment rate number for the UK we see that the situation continues to improve overall. Even wages have nudged a little higher. However there has been a quantum shift between the behaviour of quantity (employment-good) and price (wages-weak) over the credit crunch period. Accordingly I think it is too easy to project wages forwards in a Buzz Lightyear “Too infinity! And beyond” style. Yes we hope and to some extent expect a pick-up but how far will it go?

Meanwhile it would appear that one particular Quango -the MPC- could help with reducing government spending by removing the eight members who currently appear surplus to policy.

 

 

 

17 thoughts on “Is the Monetary Policy Committee still a democracy or has it become a dictatorship?”

  1. forbin says:

    Oh Shaun,

    the current media circus are such a bunch of copy’n’ paste artists with scribblers its only here on internet pages like yours we get any in depth study of whats going on.

    I expect real panic at the BoE if the inflation rate drops near to 1% yet alone 0%

    isnt either good ? Apparently not now we are near them…… good for a headline target but not in reality – whatever they say

    more people employed = good , well maybe , in my book Good means well paid jobs not benefit level wages because thats just another subsidy

    come April we will see the effect of the 10K tax band

    Forbin

    1. Anonymous says:

      1% is a disaster because the *real* target is 5%. That’s why they could “look through” 5% before. People look at 1% and think well it’s not so far from the 2% target. That’s not the real target. Everything they *do* suggests it’s not the real target. They *say* otherwise.

  2. Mike from Enfield says:

    Hi Shaun,
    I have mentioned before that I view MPC “minutes” as being a carefully edited political document. Therefore unless a member becomes so (in)famous as to justify publishing his memoirs, I don’t suppose we’ll ever know who agrees or disagrees with Carney on anything.

    Is it fair to assume that the 8 members would have been selected partly on the basis of their expected acquiescence…or does any of them have a track record of thinking for themselves and speaking out?

    1. Anonymous says:

      Hi Mike

      Sometimes they do begin to speak out but then they tend to revert to type! As to your suggestion that the Sir Humphrey Appleby appointment strategy is at play (you select someone that you won’t need to influence…) well let me respond with his masterpiece on the subject of official minutes.

      ” It is characteristic of all committee discussions and decisions that every member has a vivid recollection of them and that every member’s recollection of them differs violently from every other member’s recollection. Consequently, we accept the convention that the official decisions are those and only those which have been officially recorded in the minutes by the officials, from which it emerges with an elegant inevitability that any decision which has been officially reached will have been officially recorded in the minutes by the officials and any decision which is not recorded in the minutes has not been officially reached even if one or more members believe they can recollect it, so in this particular case, if the decision had been officially reached it would have been officially recorded in the minutes by the officials, and it isn’t so it wasn’t.”

  3. Anonymous says:

    Shaun,

    Are the baby boomers all now retired or at retirement age at least ? – is this improving the employment figures as they drop out of the picture.

    1. forbin says:

      no we cant retire – contrary to popular belief / myth our pensions have been robbed so we carry on as long as we can to just get by

      Forbin

      1. forbin says:

        ah yes almost forgot – if you’re over 55 you are often not counted as unemployed

        so that bulk of people drop out of the figures …..

        now raise the retirement age and you have a nice lump of people who do not count

        tricks? what trickery ?

        Forbin

        1. Anonymous says:

          Hi Forbin

          If we look at the employment rate and change the definition to 16 and over from 16-64 it drops to 59% from 72.3% although it too is rising. So as ever care is needed with the numbers which are presented.

        2. Drf says:

          That was Thatchers gambit which she implemented and I believe the threshold is 50 years of age; all unemployed persons over the age of 50 are not included in the unemployment number, even if they are receiving benefits of one kind or another.

          1. Eric says:

            Yep, that was me. Ceased full-time employment at age 50 . Never been counted as unemployed. … And never been in receipt of any benefit since my mother stopped collecting the Family Allowance!

    2. Anonymous says:

      Hi Chris

      It depends on how you define retirement age (or more specifically at what age people feel able to retire in these times) but there was a peak passing the age 60 in 2007. If you wish to see the ONS view of first past events and the future there is a population pyramid from 1971 to 2085 at the link below.

      http://www.ons.gov.uk/ons/interactive/uk-population-pyramid—dvc1/index.html

      I was intrigued to see a spike starting in 1979 too so it has been a factor in more than one UK slow down or recession.

  4. Just a thought says:

    Hi Shaun,

    Is the Monetary Policy Committee still a
    democracy or has it become a dictatorship? The answer is obvious …Who pays
    their salary??? Are you going to bit the hand which is feeding you? Everyone
    has a price…That is the truth about this world we are living in…Sorry!!!

    1. Anonymous says:

      Hi Just a thought

      Your logic may well apply to the internal members (the Governor, the two Deputy Governors, the Bank’s Chief Economist, the Executive Director for Markets) as they usually have careers at the Bank of England to think of. Although with his five year term ironically Mark Carney could be considered free of this to some extent.

      But the four external members are supposed to offer this “The appointment of external members is designed to ensure that the MPC benefits from thinking and expertise in addition to that gained inside the Bank of England.” It is not working is it?

      This is in spite of the fact that “Members serve fixed terms”, perhaps they all hope to be reappointed for another term.

  5. Anonymous says:

    Great column, Shaun. Regarding the UK unemployment rate, no-one seems to have noticed Governor Carney’s response to Helia Ebrahimi in the press conference on February 14. Governor Carney rejected the suggestion that the unemployment rate was the wrong metric for forward guidance. He said it was the right metric because it “was clear, easily understood widely reported doesn’t get revised”. The last part of his statement is false The headline unemployment rate is a three-month average of seasonally adjusted monthly rates. Although it is possible, it is highly unlikely that any official seasonally adjusted series would not be revised. Anyway, the February ONS release for the labour market statistics states: “Estimates are subject to longer run revisions, on an annual basis, resulting from reviews of the seasonal adjustment process. Estimates derived from the Labour Force Survey (a survey of households) are usually only revised once a year.” The unemployment rate estimates are generated by the LFS.

    The lady in charge of the tea trolley at the Bank of England is probably aware that the unemployment rate estimates are revised. How could Governor Carney, who made it the centrepiece of his forward guidance policy, not be aware of it? Andrew Baldwin

    1. Anonymous says:

      Hi Andrew

      Thank you I had not spotted that.The only number I can think of that is not revised is the RPI (because of the uses it is put eg index-linked Gilts). This reminds me of another Mark Carney faux pas where at a previous press conference he told David Smith of the Sunday Times that the Bank of England survey on inflation expectations referred to the RPI. As you can see below this is news to the Bank of England website.

      “Question 1: Asked to give the current rate of inflation, respondents gave a median answer of 4.4%, compared with 4.0% in August.

      Question 2a: Median expectations of the rate of inflation over the coming year were 3.6%, compared with 3.2% in August.”

      You might think that all the pressure to reinforce CPI would be having an impact but whatever the speculation it is speculation….

  6. therrawbuzzin says:

    Is there such a word as croneygarcy?

    1. Anonymous says:

      how about nepocracy ?

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