23rd July 2014 by The Harried House Hunter
Today has seen the Bank of England reveal more details about its past and present economic policies. If we look backwards apparently its performance was much better than we thought! Let us investigate the thoughts of Paul Fisher who has given a type of valedictory statement to the Independent newspaper this morning as he reviews the end of his term on the Monetary Policy Committee which started in March 2009. The headline sets the tone.
‘The Bank delivered the recovery’
Not much sign of modesty and we observe plenty of self-awarded praise as the article goes on.
“A number of our policies had very big powerful effects on the recovery phase, and, without doubt, things would have been much worse if we hadn’t stuck to our guns”
Those reviewing a wage packet that has shrunk over this period may be wondering exactly how things could be worse? Especially as the fall in real wages was driven by above target inflation which Dr.Fisher and his colleagues continually told us was “temporary” and instead persisted for over four years. Actually Dr. Fisher is still at it.
even though inflation temporarily went up so high.
If we move to what sort of recovery we have had then it has taken us around 6 years to get back to the aggregate level of output we had before. That is not exactly inspiring and if we note that the population has grown we can only conclude that output per head has yet to return to pre crisis peaks. Still there is one area where I can sort of agree with Dr.Fisher and that is that the Funding for Lending Scheme he lavishes praise on does seem to have had “very big powerful effects” on house prices. Indeed today’s numbers from the British Bankers Association hint that this may be ongoing as you can see below.
Gross mortgage borrowing of £11.2 billion was 24% higher than in June last year…… Having declined during the early months of 2014, approval volumes turned up in June,
Sadly Dr. Fisher did not get asked about this from June 2013.
preferring to increase the size of the asset purchase programme by a further £25 billion to a total of £400 billion.
He would have put the monetary policy pedal even further into the metal just as the UK economy was about to enter a strong growth phase! If I was you I would think about that as he praises the concept of Forward Guidance.
Foreign exchange market rigging
This took place on Dr.Fisher’s watch as executive director for financial markets. But apparently all is well and the subject is a “non-story”.
The Bank of England has released the minutes for its meeting of earlier this month today. Whilst there are issues created by the policy of Forward Guidance there are some rumblings and hints at forward policy.
On one interpretation, the risk of a small rise in Bank Rate derailing the expansion and leaving inflation below the target in the medium term was receding as that expansion became more established.
But the majority view and quite a substantial majority was this.
there was little indication of inflationary pressures building and there was uncertainty as to whether there had been a more structural change in the relationship between the labour market and inflation. Moreover, there were early signs that global growth was weakening,
However one issue was entirely self-inflicted which is the one of the “output gap” which morphed into (labour market) slack.
the degree of slack was highly uncertain,
Because estimates of the level of spare capacity had become more uncertain
there was uncertainty as to whether there had been a more structural change in the relationship between the labour market and inflation
uncertainty about the degree of slack had risen on the month
So they have put themselves in quite a muddle. Everybody can see that the economy is recording a fast rate of expansion yet apparently the “slack” is not falling. So the Minutes end with something of a teaser on interest-rates.
although for some members the decision had become more balanced in the past few months than earlier in the year.
Tucked away in the Minutes we did get a somewhat odd rationale for raising interest-rates.
would allow the Committee to evaluate the sensitivity of households, firms and financial markets to changes in interest rates, following a long period during which Bank Rate had remained unchanged.
I find that fascinating as a succession of swingeing cuts from 5% to 0.5% did not seem to have that strong an effect but now we have rather an asymmetry displayed as a possible 0.25% rise needs an evaluation of “sensitivity”. If there had been “sensitivity” on the way down in interest-rates we would have escaped the credit crunch long ago.
Bank of England Agents weigh in
As we note that wage growth trends are uppermost in the minds of the Bank of England I note this observation today from the Bank’s Agents.
The majority of pay settlements had continued to be in the range of 2%–3%, although some contacts reported increasing overtime and profit/performance-related pay.
Where there were difficulties in attracting new recruits, or concern about staff turnover, some contacts had made higher pay awards to certain employees,
This looks more positive for wage growth than the official statistics on average earnings. The equivalent number there was 1% in May. Should it turn out to be accurate and feed into the official numbers then we can expect the subject on an interest-rate rise to come up with more force as we move into the autumn. It would also represent something of a victory for the business surveys which have been suggesting wage growth is better than the official numbers. The MPC Minutes reflect this.
Consistent with this view, some survey indicators of wage growth had been rising for some time, most notably the REC survey measure of the pay growth of new employees. This had risen to a record high, reflecting firms’ reported difficulties hiring suitable workers.
Some might consider that the Bank of England is flying blind right now. It no doubt would prefer its recent actions to be considered more in the light of the “masterly inaction” suggestion of the apocryphal civil servant Sir Humphrey Appleby. However you regard it the rather troubled journey it has taken through the labour market as it has switched from aiming at a 7% unemployment rate to apparently using wages as a measure of “slack” undermines both the concept and credibility of Forward Guidance.
We observe that the monetary policy of the UK is currently being set under my “dark side” theory by the financial markets and they have tightened policy. The clearest signal is the exchange-rate which in trade-weighted terms has risen to 88.93 compared to the recent low of 77.86 in March 2013. Applying the Bank of England’s own rule for the impact of this brings us to 2.75% in Base Rate terms or 11 of the increases it seems so afraid of. Added to this we have seen other interest-rates rise as for example the five-year Gilt yield has risen from around 0.9% then to 2% now. We have moved in the Mark Carney era so far at least from active to passive monetary policy.
Let me leave you with a question which strikes at the heart at the operations of the Bank of England. If we returned to elected politicians being in charge of monetary policy right now, what do you think would change if anything?