A James Alexander post
Changes to the publication schedule mean that the the rate decision (no change, yawn), minutes of the discussion and the BoE Quarterly Inflation Report will all come out on the same morning – as well as a press conference.
At least two “hawks” are thought to be about to vote for a rate rise (Weale and McCafferty). Unfortunately, or rather fortunately, their credibility is zero having voted for a rate rise for five months of 2014 before backing down. Weale, infamously, even voted for rate rises for the first seven months of 2011. Frighteningly, he was not alone back then as two other hawks (Dale and Sentance), both now off the rate-setting committee, also voted for rises. God knows what might have happened if the UK had followed the ECB in its disastrous 2011 rate hikes. Slightly worryingly, one long term swing voter, David Miles, may join the hawks this week.
Why are the hawks getting so angsty? Inflation, headline and core, is nowhere to be seen. Early indications for both NGDP in 2Q15 growth are very poor. The unemployment rate appears to be leveling off. Arguably, monetary policy is passively tightening at the moment. it is certainly no time to be actively tightening. The one “risk” is from the decent uptick in private sector wage growth that appears to be underway, finally. If true, this should be a cause for celebration not a shooting. And, who knows, it might even lead to some productivity growth.
One saner voice appears to be that of the newish Chief Economist, but long-term BoE veteran, Andrew Haldane. His ability to think outside the box has not endeared him to conventional Inflation Targeters. His mostly excellent speech “Stuck” came in for a lot of criticism as he said he was undecided whether the next move in rates would be up or down.
His boss, the Governor, seems keener to tighten at some point in the near future, almost in conjunction with the Fed. Although Mark Carney has brought a much needed breath of fresh air to the BoE and much greater sensitivity towards markets than his predecessor, I have been disappointed he has not developed from his famous December 2012 speech on Guidance while still at the Bank of Canada, where he also raised the possibility of NGDP Targeting. Somehow, the BoE-borg (a close relative of the Fed-borg) has got hold of him and we are mostly still stuck in the Inflation Targeting mode of thinking.
I suspect that there is still a reluctance of old-guarders to move to take NGDP Targeting seriously as it would imply a criticism of the central bankers reaction functions back in 2007-2009. Carney did sort of move towards a mea culpa acknowledgement that something had gone wrong in his June 2015 Mansion House speech but mainly as regards to liquidity, not monetary policy:
The Bank of England’s Role
All must play a role in building real markets, including the Bank of England.
Although the Bank does not regulate conduct or markets per se, it has responsibilities for, and powers over, the stability of the UK’s financial system as a whole.
In the run-up to the crisis, the Bank’s contribution to the effectiveness of markets fell short in three respects. In all cases, the Bank is now responding.
First, the Bank’s framework for providing liquidity was shown to have lagged behind market developments. Once under pressure, the Bank could neither stabilize overnight rates nor support the banking system. Fortunately, in the jaws of the crisis, the Bank innovated rapidly and admirably to avoid a collapse of the system.
Those lessons are now embedded in a new, comprehensive framework for the Bank’s sterling market operations. We have expanded the range of eligible collateral, and will lend to many more counterparties, at much longer maturities. The Bank also stands ready to act as a market maker of last resort.
Constructive Ambiguity has been replaced by Open for Business.
Unfortunately, the near apology was lost in his populist bank-bashing proposals. Perhaps it will be the next Governor who makes the big paradigm shift, Carney just isn’t that revolutionary.