Life’s a bitch… and then we get the Bank of England’s Quarterly Inflation Report. Time was when the publication of the Report with its legendary collection of fan charts reinforced the opinion that of all the major central banks, the BofE had the most rigorously disciplined economists. That was, I suppose, until strict inflation targeting was imposed as the central remit by the now entirely invisible Scotsman, the one who abolished the boom and bust cycle and who saved the world.
The Old Lady’s inflation target is 2% and, not surprisingly, the vast majority of forecasts which have come out of Threadneedle Street over the years have found that inflation, in the medium to long term at least, is always set to land spot on 2%. We knew they were wrong, they knew they were wrong but as one is loathed to tell one’s other half that she looks bloody awful in that new outfit, so we all smiled sweetly at the Bank and quietly got on with disbelieving while saying nothing.
Then, at yesterday’s iteration of the press conference in which the Governor, Mark “The Magician” Carney presented the report, he effectively jumped the gun and in as many words admitted that the Bank hasn’t got any better clue than the rest of us what will be happening next. The precise excuse ran along the line of: “If you can’t predict the oil price, which nobody can, then you don’t stand a snowball in hell’s chance of forecasting inflation, whether accurately or inaccurately”. A courageous admission to be sure but, having spent the first two and a bit years dismantling the mystique that the Bank might just know something we don’t, he has now shot down the last of its admittedly ropey looking advantages. Not good to turn up at the release of the Bank’s benchmark publication, the Quarterly Inflation Report, and to tell the audience that you really have very little idea where it’s going.
Might it not be time to relieve the monetary authorities from setting monetary policy and leave that to the markets which are, if not regulated out of sight, still pretty efficient and get them, the central banks that is, to focus on financial stability by way of steering more pro-actively the reserve ratio’s on the banks’ balance sheets?
Let interest rates become a function of financial policy rather than the other way around. There is very compelling school of thought, ably represented by my friend Charlie Haswell, formerly of HSBC’s Public Policy Unit, which regards the control of credit as the single most important role of central authorities and, by osmosis, blame the GFC on their flagrant failure to have done so. Banks, so he argues, create money. What he should go on to say that when the banks became more reticent after the crash (not surprising given what they had just been through and what they were having thrown at them in terms of both alleged collective guilt and by way new and one size fits all regulation) the central banks simply filled the gap and called it “unconventional policy measures” or Quantitative Easing to you and me.
On rates and LTV
On the subject of the Old Lady, there was a very good interview with Deputy Governor Minouche Shafik on the Beeb this morning.* They introduced her as the first female Deputy Governor which is of course wrong – she is the first since Rachel Lomax but since when has the soon to be ex-employer of one Robert Peston let the truth get in the way of a good story, especially a gender related one? Still, that should not detract from the wonderful air of common sense which prevailed throughout her broadcast.
The only bit which struck was her take on the Governor’s comment yesterday that interest rates are not the right tool with which to steer the housing market. Dr Shafik suggested that caps on LTVs (loan to value ratios) would be the easiest way to do the trick but as we know from last time round and especially from the US, these can look very sick it the market retraces and what was once an 80% LTV in a bubble can overnight suddenly be a negative equity situation. In the US of course, the mortgage was linked to the property and not the individual which led to the famous practice of moving out and posting the keys through the lending institution’s letterbox. Set the LTV too high and a bubble can be created; set it too low and the real estate market stalls, wiping out the life savings of most middle class house owners.
There is no question that the UK economy is, as is the American one, strong enough to support the first gentle, even timid steps towards normalising the interest rate structure. The coward’s option is to shirk the risks which standing up and being counted might bring with it. Instead of that, Carney let it be known that rates will most probably remain on hold until at least the end of 2016 and possibly into 2017. Sterling lost a cent to the dollar and a cent to the euro.
Given The Magician’s hair-raisingly poor predictive track record and utterly useless attempts at forward guidance over the past 2¼ years during which he has been at the Bank, the best response simply must be to lock in long rates now and to buy the living daylights out of the pound.
Incidentally, amongst others, I lunched yesterday with a bunch of manufacturing gentlemen from the Midlands, all of whom are in industry and in one way or the other actually make things. Firstly, it was nice to hear them all sound quite positive about life, the universe and everything. Secondly, it was even nicer for once not to be vilified for being a banker. It was, however, humbling to hear one of the tell me how the aftermath of the GFC had cost him two UK factories and over 200 jobs. The bitterness seemed to be present but tempered and obviously off-set by the current revival of his fortunes.
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Alas, it is that time of the week again and all that remains is for me to wish you and yours a happy and peaceful week-end. The rugby is over, the garden is bedded down for the winter and the weather forecast is dodgy at best. But, yippee, bonfire night tomorrow with a bearded Guy looking remarkably like the Jeremysaurus followed by Remembrance Sunday; red poppies please. What a juxtaposition….
(*Corrects spelling of Minouche Shafik from a previous version)
