5th August 2010 by Shaun Richards
In a world in which bank statistics and figures are pored over by analysts and economists to try to discover not only which is going on with the individual bank but also the underlying economy this has been a week which should offer some insight. However there is a potential catch. Such is the way that regulators and accountants have interacted that in fact it is hard to infer much at times from looking at some sets of accounts. For example let us take a look at Lloyds Banking Group’s figures from yesterday. There were three profit figures presented which were £1.6billion, £1.3billion, and £280 million. At least the range this year was only £1.3 billion last year it was £14 billion! Somehow the accounting profession seems to have developed a system which confuses rather than enlightens investors. I notice also that the return to profit (at least all numbers were a profit this year) for Lloyds was driven by a fall in bad debts to £6.5 billion from £13.4 billion which leads to a whiff at least of financial alchemy in the results. I gather than a fair proportion of the bad debts reported are from commercial property investments in Ireland and will look into this further.
After writing on commodity prices yesterday I thought that I would give an update on developments. Overall commodity prices continue to rise with the CRB spot index increasing by 3.23 yesterday to 443.54. One factor in this rise would have been the price of wheat which continued its recent rise and is now at US $7.68 per bushel. As might be expected at a time like this there are all sorts of rumours such as Russia looking to ban exports of grain, however we have a long way to go before we reach the highs of 2008 when the price exceeded US $13 per bushel.
A comment on this blog reminded me that there are quite substantial inventories of grain around the world of around 200 million tons and suggested that much of the current rise is speculation. Well one thing that is for sure is that the inventories are suddenly a lot more valuable and with governments short of cash around the world perhaps they could sell some.
The Monetary Policy Committee
At noon today the Bank of England’s Monetary Policy Committee will publish its interest rate decision following its two-day meeting. We are at one of the points in time when it is possible that all potential results could be represented, tightening, no change and an easing. Also it will be discussing updating its forecasts as we will soon have its quarterly report on inflation forecasts. There will be some head scratching going on as the recent performance by the MPC in this area has been dreadful. For example a year ago they forecast that inflation would now be less than one per cent whereas it has been over three per cent for some time. Now whilst such a conclusion may not seem a big deal remember that they take policy decisions based on these forecasts. Therefore they would have been setting economic policy expecting lower inflation than exists suggesting that they have set policy to over stimulate the economy. Some feel that the rise in Value Added Tax that took place in January of this year means that in some way this is a less important error. As it was an event known at the time actually to my mind the impact of the rise in VAT should have been predictable.
The argument for this is simple and has been expressed by Andrew Sentance who has voted for an interest rate rise at the last meetings. He feels that the number of occasions in recent years where inflation has exceeded its target (41 months out of the last 50) has within it the danger that inflationary expectations will rise. He also feels that the world economy is recovering more strongly than expected. Accordingly he wishes to start to reduce the degree of monetary stimulus in the economy. He is not in the camp of applying a brake he simply wishes to stimulate less.
The case for easing
This is essentially a proactive argument which involves the MPC getting out its crystal ball and looking into the future. Here proponents of further easing see dangers to UK economic growth from several factors. On the worldwide scene we have an apparent slowdown in growth in the United States and the expected impact of the austerity packages which have been implemented in much of Europe. On the domestic front we have the austerity Budget implemented on June 22nd by the UK Coalition Government which they expect to push UK domestic demand lower.
So those in favour of easing will further point out that monetary stimulus takes time to have an impact and that accordingly it would be better to act now and get ahead of events. It is usually considered for example that a monetary stimulus takes around 12 to 18 months to have most of its impact. They are unlikely to argue for a cut in official interest rates as they are already at 0.5% so would be more likely to suggest an increase in Quantitative Easing or asset purchases.
The Most Likely Outcome: Unchanged
As the world economic outlook in the words of Mervyn King the Governor and indeed the Chairman of the Federal Reserve Ben Bernanke is “uncertain” then it is most likely that the MPC will choose in this meeting to do what Sir Humphrey Appleby of Yes Minister called “masterly inaction”.
It is not impossible that the vote will be closer to easing than we might think. After all there is a lot of debate at the moment suggesting that the Federal Reserve may undertake some further monetary stimulus at its meeting next week. So it surprises me that there is not more debate on whether more easing might come from the MPC.
Opinion and Comment
One factor against the easing camp is the forecasting record of the Monetary Policy Committee. After its recently dire performance I would suggest that some humility is required and this would to my mind on its own militate against further easing now. Also it has consistently set policy based on this over-pessimistic basis leading me to conclude that currently we have plenty of monetary stimulus in the UK economy. I think that it would be more logical to look further at the impact of this stimulus before undertaking any more.
As to tightening now this leaves me in a slight quandary. I wrote on here at the turn of the year that I favoured a reduction in the level of stimulus in the UK economy as I feared an uptick in inflation and accordingly I would have raised the official interest rate to 1.5% to try to reduce the impact of this on inflationary expectations. However as the lags in monetary policy are long and variable I do wonder if the time to raise may have passed as there is now evidence of a possible worldwide slowdown in economic growth. If I move from what I would have done to today’s reality I would still join Andrew Sentance and vote for a small rise in rates as I feel that continually letting inflation exceed its target and not responding is a policy error.
Other World Central Banks
The Federal Reserve
Here we have another example of the “uncertainty” that is currently prevalent. We see the Federal Reserve this week actually trialling measures to reduce the level of monetary stimulus in the US economy at the same time as speculation increases that at its meeting next week it will in fact try to stimulate the US economy again. So whilst there is speculation concerning QE 2.0 or QE lite to use a couple of the suggested titles which involve either more stimulus or more inventive ways of applying the exiting stimulus measures.
As I have written before the Federal Reserve has found that its plans for 2010 have gone somewhat awry. Having planned to reduce its stimulus measures it has endgamed itself for now, because if it stopped these moves it would reveal its hand and yet at the same time it is concerned by economic events…..
The European Central Bank
This situation is slightly different as it is only on May 10th this year that the ECB found itself implementing a QE type policy to try to help the peripheral nations in the euro zone. So in its timetable it ended up being over a year behind the Bank of England and the Federal Reserve. In effect as it too was planning a reduction in stimulus measures it was in my view forced into a u-turn by the euro zone politicians.
However behind this in more technical areas which are likely to be outside the influence of politicians it has been making some moves. For example its 12 month long term refinancing operation expired at the beginning of July with only a 3 month replacement. Also its weekly operations have been draining funds from the system as an example of this we saw that this weeks Main Refinancing Operation amounted to some 155 billion Euros whereas last weeks was 190 billion Euros. The rise in euro zone interbank rates such as 3 month Euribor which is now 0.9% could be part of a withdrawal policy by the ECB.
So in today’s announcement the ECB is likely to have an unchanged policy regime but it may come with hints of more withdrawals of stimulus measures.
At this moment in time we find the worlds main central banks probably as uncertain as they have been during this economic crisis. The most recent economic data available presents a troubled picture for the world economy but it is not yet definitive. It would be strange to say the least if we saw a planned reduction in measures from the ECB this week and an increase in them from the Federal Reserve next week.
The Monetary Policy Committee has a slightly different problem as inflation has been more of a problem in the UK than elsewhere and it has performed poorly on this front. However it is likely if anything to continue on its recent path of seeing its job as supporting the economy rather than aiming at an inflation target. To my mind this questions its whole reason for being as politicians and government could do that with probably not dissimilar results.
I will update later on the results of the meetings.
Bank of England’s Monetary Policy Committee August 2010 Meeting Result
The Bank of England’s Monetary Policy Committee today voted to maintain the official Bank Rate paid on commercial bank reserves at 0.5%. The Committee also voted to maintain the stock of asset purchases financed by the issuance of central bank reserves at £200 billion. So no great surprise and we will have to wait two weeks to see if there were any dissenters to this result.
European Central Bank August 2010 Meeting Result
The ECB voted to day to keep its official interest rate at 1%. I will update if there is any particular news from the Press Conference it holds after announcinmg the vote.
President Putin bans grain exports from Russia
Russia has announced it will impose an export ban on grain and grain products from August 15th to December 31st as a response to the effect of the country’s worst drought in half a century on its expected wheat crop. A more preferable move would have been for world bodies to have got together and used some of the approximately 200 million tons of grain stocks which exist to stop panic moves like this but sadly this seems unlikely, although of course it does beg the question of what the purpose of such stocks is/are.
Of course if speculation is at the route of this I suppose that conspiracy theorists might start to wonder if the buyers have been oligarchs…Either way the price of wheat is now above US $8 per bushel.