Tepid Bank of England hamstrung by past leadership and groupthink

Does anyone remember Mark Carney. back in the days when we thought only hiring foreign experts would do, we had this Canadian lead the Bank of England.

In his whole tenure he promised much but did less. There were few changes in interest rates and post the 2008 recession we actually dropped rates throughout the recovery by 0.25%.

And we poured in yet more Quantitative Easing to create the easy money. This has come back to bite us quite nastily now. 

And yet today's Bank of England has chosen to raise interest rates by 0.25%. Whereas the Federal Reserve went for 0.75% - inflation is worse in the UK too. 

Whilst the £ has recovered a little today on the back of the rise, it is at a very low $1.23, exacerbating our energy crisis through the exchange rate fiasco. 

Moreover, the Bank is frit from cancelling QE  and reducing money supply. thereby baking in a long road to reduce inflation. in the 1980's we would be talking about Interest rates at 12% -15% by now. 

But so sleepy is the Bank and so slothful in its actions that we will be lucky to have 2% interest rates in 2022 whilst experiencing 10%+ inflation. 

Frankly, it is unbelievable. Mind-numbing. A wilful destruction of the Pound and people's real net worth and assets to bail-out the Government of its debt and to the hope that something will turn up. 

All the Bank of England Monetary Policy members should be sacked forthwith due to showing an insufficient understanding of their remit which is to manage economic stability! Not promote instability. 

Interest rate rise klaxon!

My goodness. 

The denizens of the Bank of England have only gone and done it, raising interest rate by 0.15% today. A harbinger of the doom to come. 

Inflation sits at a mere 5% or thereabouts and surprisingly wages for the year have manager, err, 0% rise. Too much covid and change in the economy to sustain wage rises even though some sectors have done well. 

Still this is almost the first rate rise I can remember! People under 30 won't even really know what the Bank of England does or what the significance of interest rats is - we have been in a zero-interest economy for so many years, nearly a decade and a half now. 

Of course, with Quantitative Easing and inflation, real interests rates are at -5%. Holding cash is very bad for your wealth, much better to spend it or buy assets as quick as you can. 

It is still a long way from going back to a 'normal' economy and I still feel in the end the only way back will be with some very high inflation to erode the debt pile of the West vs East dynamic in the world - and that will be so painful that the politicians might try and put it off for generations yet. 

Will UK interest rates ever rise?

Of course they did, quite recently, back to heady heights of still below 1%.


But the Bank of England, giving its favourite 'guidance' suggested that this was the first move of many and that rates would soon be back to normal (well, over 1%).


Then, as always, reality intervenes. There is some fairly grim economic data out today. Firstly Manufacturing is estimated to have shrunk in the last quarter; then imports have increased as our oil refining capacity slips and exports have grown only a little. Throw in some underwhelming services sector growth and some bad weather and we will be lucky to see much first quarter expansion at all. The economists seem to come in at a consensus of around 0.2% of sclerotic growth.


So the Bank will be left with yet another dilemma in May, to raise or not to raise?


The longer-term issue is that the recovery is eight years old now. Lots of things, like the London Property market,  the Stock Market, the level of consumer debt are all looking like they could easily move down. This is without the panic inducing international political situation interfering. Even the good old oil price is back to $70 - a high level compared to the past couple of years.


But if we were to go into another recession with very low interest rates and a small Government deficit  there are going to be precious few macro levers for the Government to pull to keep the economy going. No doubt most commentators will say this is all the fault of Brexit, but it absolutely is not, these factors would be there in any other situation too, given the length of the bull run.


The saving grace may end up being that the real economy is running with enough spare capacity that slow growth can continue for a long time; even whilst capital owners are stuck for investments and returns.

Still a long road to normality: Update

The US raised interest rates yesterday, as did China following suit. It is a very long road back to financial normality after a financial crash of the like that we had in 2008 (on average 19 years historically, so we are only just over half-way!).


However, in the UK we have a particularly dovish Bank of England Governor at the moment in Mark Carney. This week has seen wage growth pick up and the economy continue to modestly improve alongside record employment. Few commentators or even economists seem to notice that with near full-employment the days of rapid economic growth are gone - all improvements have to come from either improving productivity or investment, neither of which is easy to do in the UK economy. The days of just hiring more migrants on shit wages and declaring economic nirvana as nominal GDP rises are over - THANK BREXIT FOR THAT!


Still, the Bank of England is left with a choice today, does it raise interest rates again? The Bank will likely decide to wait another month or two to see what is happening in the economy and take a view that the awfulness of Brexit means that it should stay with very low rates.


Which is a shame because we won't get investment levels from companies up and from individuals whilst the saving rate remains so low. All we see now is the continuation of the nightmare economy where the already rich borrow very cheaply and make easy returns; whilst the small companies and business are starved of capital holding back productivity gains.


Of course, too high rates can stall the economy; food retailers and general retailers are already struggling in an easy money environment so won't cope. But the wider economy will not recover its vigour until we move back to a more 'normal' economy - its a difficult balance to achieve but the Bank of England really needs to get its Hawkish skates on to fix the economy.


UPDATE: BOE holds rates, murmurs about doing something next time, circumstances allowing etc etc.

0% chance of UK rate rise this year

Bank of England Interest Rate since 2009

That is not much of a prediction now, but one that would have seemed unlikely 6 months ago. It is now 7 years since interest rates were rapidly reduced to near zero.

It was an emergency measure. As a rule of thumb, interest rates have become a good guide as to how messed up our economy is. Here we are seven years late and still stuck in 'emergency measures.'

And there is little sign of this changing, with Share prices having dipped 10% in the last few months and commodity prices continuing to fall, there is no external inflation to impact the UK. China has devalued too, meaning our imports will cost less for Christmas.

There are some inflationary worries, construction has started to drop off as prices of labour have gone up 20% as a lack of supply of key skills starts to bite; but even here this is cyclical industry that is always hit when growth comes as they are the first to lay off everyone in weaker times.

Meanwhile, the deficit and national debt get harder to reduce, as does private indebtedness, as many debts are not eroded away by inflation over time. Real things, like UK House prices, become more expensive than ever as their real terms increase in price is larger than it ever use to be.

Sustaining growth in a deflationary world will be a very difficult task for the economies of the West; just as they have found in Japan.

When will inflation return? That is an even harder prediction. Wage inflation has been so limited by immigration and automation over recent years. Perhaps an unintended consequence of the Government's decision to increase minimum wages will be to push some inflation into wages over the next 2 years. Equally, commodity markets must be entering the final down phase by now - indices' are all at decade lows or worse. With commodity falls coming out of the picture and domestic demand slowly picking up then inflationary pressures will growl; but it looks like a slow rise from here if most external shock are likely to be deflationary rather than inflationary.

Perhaps rates will still be at 0.5% this time next year? Who would have thought that in 2009.

No rate rise in 2014 says Bank of England

How has it come to this? the Bank of England has a new obsession with 'forward guidance' - which as Terry Smith writes in the Telegraph today is a ridiculous statement, as if there is backward guidance!

But now Spencer Dale has decided to tell everyone that he does not think the economy will be in good enough shape to raise rates in 2014. We are only just into Q4 of 2013, but the sages of finance can see well into the distance.

Well, this tells me a few things:

1 - Clearly the economic recovery is not going to be very good, perhaps even dropping off from here on in. If growth continues at 0.5% per quarter, how can rates not adjust to what we would see a normal growth? therefore, the BOE must believe growth is going to be well below that next year, maybe 1.5% or so.

2 - Who cares about a housing bubble? Certainly not the Bank of England. As it happens, I don't think there is much of one either yet. But I do see an problem, not of 2007 proportions, in Commercial Real Estate. Yields are 5% and falling for prime buildings. Even in regional cities they are 7% for good properties. How these deals will make sense when rates rise I do not know.

3 - Long term huge damage is being done. people now in their mid-twenties do no know what a real interest rate rise feels like, except if they use Wonga perhaps. Debts on property are building up with people thinking 4 or 5 percent is a big mortgage. In the 1970's, 1980's and 1990's we had multiple periods of 10%+ rates and 15%+ mortgages. How are people going to adjust when normality returns? The longer the BOE leave it, the more conditioned to ultra low rates people become.

4 - Savings, what's the point? With super low rates but still mediocre inflation, money and saving have no value, getting into debt becomes the sane choice. It's a huge moral hazard, all taken it the name of defending the Banks and the deficit.

Stop QE and raise UK interest rates

QE is not working, we have tried this now for several years, since 2010. Every time the UK tries it the effect gets less and less - the law of diminishing returns.

Worse the more we continue the more likely people will realise the fallacy of pretend money printed to help the Government keep the deficit rising. There is no plan for paying back QE. I have asked several of the leading economists in the City in recent days and all are baffled by the answer. Some say it will be run off, others that it will be monetised. Not one of them seriously believes the bank will put it back to into the market - demand would crash and rates spike.

So the more we do, the more difficulty we are getting into. Worse now, is that the effect is so weak, yes the stock market is stronger and the banks are fully zombified without breaking. But the economy is flat. No new companies are coming in to take out the heavily indebted and so spark a wave of consolidation. The banks roll over loans they know cannot be repaid in nominal terms.

If we raised rates, the situation would change, savers would get a return, as would investors. More normal market disciplines would return - maybe even the banks would be forced to write off more loans and de-zombify the economy.

The pain would be worth the gain, of course, as it would stall house price inflation and favour exports over imports, no Government is going to want to do this. But surely this is the sensible option, going back to normality and away from fantasy? instead we have prediciotns of 3 more years of ultra-low interest rates; and so 3 more years at least of grindin nothingness for the UK economy. My only hope is the notes of the Bank of England meetings show that at least a new way is being discussed, even if only by a minority.

The canard of lowering interest rates

I have noticed of late the growing calls for further cuts in interest rates. Now, as I have a rather timely bought tracker mortgage this would be welcome on my own part; but really this is economic delusion of the first order.

If low interest rates are the answer...what was the question? Well, we have a balance sheet recession where there is far too much debt built up in the system. Lower rates would in theory help to give more time to those who need to repay their loans.

Even the Bank of England has not been convinced that this is the way. The reason for this is the Japan style liquidity trap it creates. Firstly, with no interest to be gained, nobody saves, this leads to less bank deposits - so banks hoard more money and make fewer loans. This is a liquidity trap. Secondly in the liquidity trap, because rates are so low, banks can't make a decent return anyway, so further adding to their desire not to lend. Finally, Quantitative Easing means they can make a nice small amount of money by just swapping monetary instruments with the Bank of England - so why bother with the real economy and real lending?

As if all this is not bad enough, if you are small lender like a Mutual, struggling to raise cash and having to offer high interest rates to attract depositors- whilst having no access to QE money - then you are finished as you can't raise money at 0%. We have already seen the decimation of the Mutual industry and this would probably spell the end for many Mutuals - how does that tally with the Vickers report aim of making banking more competitive?

And of course say you are a saver, this reduction in rates is very penal, rates being already far below the inflation rate which is likely to start going higher again son as food prices and Oil & Gas go up during the course of this year.

Interest rates are not the problem, the problem is too much debt to be serviced; this needs to be written off and the economy made more flexible. Maybe lower taxes would be a better way to provide the money to repay the debt or to reduce regulation so that new businesses may grow and prosper. The time for propping up the sick by juicing their rates is long-gone. It's time to face reality not try to resuscitate the debt patient.

Bank of England do nothing on UK interest rates

That time of month again, the time they gather at Threadneedle Street to drink tea and do nothing. Transfixed in the headlights they are too mesmerised by the oncoming lights:

- The light of the end of US QE which will knock US inidices by at least 10%.
- The light of UK recovery number suggesting the 'recovery' has subsided.
- The light of the Euro debt crisis from which we are just a smidgen away from being embroiled in.
- The light of the boss of State owned Lloyds noting that his bank is still borked and needs continued life support.

There are no easy answers to any of this, but current policy of doing nothing has seen a retrenchment in UK prospects in 2011 - raising rates or more QE maybe the answer - doing nothing is fiddling whilst Rome burns.

Where to for UK Interest Rates in 2011?

Well we are well into Q4 of 2010 now and the consolidated predictions of the City economists I published a year ago have been proved good to date; but the future is rocky.

The Bank of England is trapped in the zone of a UK economy experiencing internal deflation and yet importing inflation (from China, commodities) via its trade deficit. A peculiar and hard set of circumstances to judge; so hard that it has not done anything year to date....

This is very much as was predicted by economists last year. However, now they all thought that in Q42010 the recovery would be well underway and interest rates could begin to rise. Instead we find the Bank of England thinking about lowering real rates further by doing more Quantitative Easing.

So are rates going to shoot up next year? The answer to which maybe is will it matter? Already the cost of funding to UK banks is currently only low because they are accessing the UK Special Liquidity Window (i.e. more taxpayer lending, albeit profitable) and the European scheme. As comments to the previous post pointed out, this will end next year and force banks to come to market. This is then going to push up real rates and Libor may again climb 100 or more basis points (1%) over the Bank of England rate. banks are going to have to raise capital to avoid a bigger crunch than this - so this is No time to won bank shares either.

What is unlikely to happen is that rates this time next year are at 0.5%. Last year it was pretty clear that the headwinds were such that rates would stay low; Cityunslicker took out a variable mortgage with a low rate to take advantage of this. Next year the economists may well be proved right, with Bank liquidity needs forcing real rates to rise (in which case the Bank of England will have to follow, or else disband itself as it becomes meaningless - but it won't be sold to the public this way). However, given the weak state of demand in the economy, rates are not going to shoot up to combat external inflation that we can little about and 4 rate rises will be a lot - still then keeping rates under 2%.

Time yet then to wait before fixing a mortgage - less time though to get one as Banks suffer another bout of credit crunching.

May Inflation Down

Some good news for the Bank of England at last. Both CPI and RPI inflation fell in May. The Bank has been way out, on the edge even of its ridiculous fan charts, for some time. In a more normal environment the pressure to raise interest rates would be extreme. Now at last there is a shroud of respectability in the constant predictions that inflation would fall off.

Now the writers of this blog are split. I am with the deflationists in seeing no move yet to high inflation (ultimately of course this is the policy goal of all major Western Governments except Germany faced with Chinese mercantilist policies), but with it building up in 2011 and 2012. As such my forecast has been for low rates until the end of this year and then a sharp rise, much more than will be comfortable through to 2013/14 or whenever the next bust begins.

Nick Drew and Bill Quango are far more of the view that the Bank of England is wrong and that inflation is here already to stay and can only go up - hence buying Gold and stocking up on baked beans.

We will see, but this is an interesting point, a return to inflation in the next 2 months will mean a rate rise, a continuation of the fall will mean rates staying ultra low, possibly well into 2011.

S overall, more bad news for savers and good for debtors.

C@W UK interest rate predictions

Hope the above chart is useful, click on it to make it larger if you want to see the detail. I have been to several presentations in recent weeks given by respected City economists. This is my effort at amalgamating their interest rates predictions for the next 5 years.

Such long term predictions are very hard to do and always wrong; hence economics being known as the dismal science.

However, if you are looking to invest some money right now or make a borrowing, this will give you some guide as to what to do. For example, keep a floating rate mortgage for another year and then switch to a five-year fix.

What is behind the numbers? Well effectively the consensus is that next year will be poor for sometime, then the real long-term effects of QE will kick in driving a big growth spurt in 2011/2012. The resulting inflation and need to finance the fiscal deficit will create a need to raise rates quite sharply back up to more expected rates.

So if you are a saver, only another year to go, if a borrower only one more year of the head-in-the-sand can be maintained. it will be interesting to look back and see what the outcome is. There could be several external shocks which make the chart a lot more exciting.

Bank of England Interest rate decision - 0.5% cut

The UK Central bank long ago lost control of monetary policy in the UK and we have been battered by the markets ever since. The pound taking a kicking and the stock market too. Even UK Gilts have lost their glean as international investors withdraw their money from the UK at record rates.

In the face of this, the Bank has decided to massively reduce interest rates, now down to 1.5%. Today another 0.5% cut is expected. I don't see this as having much effect on the real economy in the UK. It is not as if banks are going to cut the rates they charge businesses for lending in such a difficult environment. It may help to lower LIBOR - but no one cares about that anymore as no banks lend to each other anyway.

With real courage, the bank would leave the rate where it is, acknowledging that this phase of economic policy has reached its final point. The next phase is to replace bank lending to companies with direct government lending, this will stimulate the economy as is needed.

Done well it may even turn a small profit for the HM Treasury.

The bank need to wrestle back control from the markets and stop copying slavishly every US decision. Inflation is going to fall anyway, negative rates are not the answer - just look at Japan 1990-2008.

UPDATE: As predicted, they did the 0.5% cut.

The pound in your pocket..is a Euro!

Hopefully the Anti-Terror squad will not be around to arrest me for this. But it has to be said, there is a sterling crisis now. Not next year, but now.

Every day the pound has weakened this week against the Euro. The Tourist rate is now 1.08.

Ouch.

I Hope no one is planning a holiday abroad. I was in Italy in the summer and the paltry rate then was 1.25 I found the relative costs of meals etc to be the same as in the UK. Now it will feel very expensive to go to Europe indeed.

The Pound may well fall to parity with the Euro and the Dollar in the coming months. IF that came to pass it would really mark a new low never before achieved in history for the UK.

At some point in a Sterling crisis the Bank of England will have to do something; that something is raise rates. However bad the recession and all the economists predictions of 0% rates the reality may well be that we have to hold rates above the Euro-rate and Dollar-rate to defend the Pound.

Why defend the pound you ask? Well, imports, of which we have lots, will become very expensive fueling high inflation, which would necessitate raising rates anyway. The boost to exports from a cheap currency may be welcome, but so far there is not much evidence of this being a boom to the economy. Crucially, for a Government set to borrow billions of pounds, a weak currency will cause a gilts strike as foreigners will demand a huge premium to maintain their investment or will not by the gilts at all; this issue would be negated by a stable currency.

It will be interesting to see the political and economic reaction to this over the coming weeks. below are the 2008 charts for £ vs USD and Euro:

BOE drop UK rates to 2%

The graph they have produced says it all. Completely flummoxed by events and attempting a hand-brake turn at speed:

We called for rates to fall much earlier in the year. Now it is too late to avert the worst of the recession. Worse, I now foresee rates having to climb by March to help finance the Government deficit spending and to avert the Pound from falling below Dollar and Euro parity. In the teeth of a recession too. Ouch.