Two reports in the FT grabbed my attention this morning. The first concerns comments made by Andrew Bailey, Governor of the Bank of England, at the International Monetary Fund meeting in Washington DC this week. The FT notes:
Inflation is fading more rapidly than central bankers expected but the UK needs to see a continued retreat in services price growth from current levels, the Bank of England governor said on Wednesday.
They added:
But he also warned that services inflation remained above levels that were consistent with the BoE's objectives. “Disinflation — and the UK is part of this — has actually taken place faster than we expected it to,” Bailey said at a meeting of the Institute of International Finance in Washington. However, he added that “we've got to see services prices inflation come further down”.
The last is, of course, his excuse for keeping interest rates way above the levels that the UK economy now requires. What really matters is the first of his comments, which is that inflation is coming down faster than he expected when those of us with more interest in this issue than his exorbitant salary has ever induced in him have long been able to predict this fact.
Then I note this comment:
The Bank of Canada has lowered interest rates by a bumper half a percentage point to 3.75 per cent, with rate-setters resorting to a bigger cut to boost weakening growth.
They then noted:
The widely expected cut was the fourth in a row by the G7 country's central bank. However, earlier cuts had been of a smaller quarter-point margin.
Tiff Macklem, the governor of the Bank of Canada, told reporters: “From what we saw in the recent data, there was broad agreement to take a bigger step today. If the economy continues to evolve in line with our forecast, we will be cutting rates further.”
Canada's inflation, like that of the UK, is falling fast. It hit 1.6 per cent in the year to September.
Prices are, however, falling because economic activity is slowing. The Bank of Canada has already delivered what Andrew Bailey wants in the UK, which is a marked economic downturn with the risk of recession built into it. We are heading that way.
Why did this grab my attention? Because what is readily apparent now is that there is a very real risk of dramatic overshoot from Bank of England policy - where the risk of massive further pressure on households is high because of them refixing their mortgage rates at levels that are too high - and because the cost of investing is far too high for much to happen.
Andrew Bailey has got every call on inflation wrong since 2021. What troubles me is that we may not have seen the worst of what he has had to deliver as yet: the risk that he will bring the economy down remains very high. He did for Liz Truss with his ill-thought-through announcement of quantitative tightening in September 2022, the day before Kwasi Kwarteng's first and last fiscal statement. Will he do for Reeves and Starmer as well? It really cannot be ruled out.
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I wonder, on the basis that forecasters who have skin in the game are interested in accuracy, the remuneration of all Senior officers and advisors to the MPC should be adjusted quarterly by the error in their forecasts of the inflation rate for the next quarter? Using a Taguchi type loss function, so if they’re close they don’t loose much but if they are way off as they have been for years, their pocket is hit hard. Similarly, if they crash the economy their own crashes too.
Those in power should carry personal responsibility for thir decisions.
I like it
Thank you, Richard.
How about the brains trust you have assembled here draft something and have Clive Lewis table in the Commons? Ruffling such feathers is long overdue.
He’s stuck his neck out on wealth taxes
But to keep the whip there are limits he has to observe
Excellent….performance related pay, just as much of the great unwashed have to accept.
The BOE seem to me to be operating policies not in tune with the political objectives of the government, really an untenable situation. Starmer needs to act as Andrew Bailey retires in March 2028, too late for much action by the government to create a feeling of well-being prior to the next election.
I think many would argue that BoE policy is precisely in line with StarmerReevesonomics – which is a continuation of Tory NeoCon policy.
“Will he do for Reeves and Starmer as well? It really cannot be ruled out.”
If that’s what it takes, have you just discovered the reason for Andrew Bailey?
Hmm………..
So we have Chancellor – a female one – I have to laugh, sorry – and BoE governor who both pretend not to have a power relationship in the interest of democracy, acting as handmaidens to a contrived crisis being used to shoehorn in the private sector.
It all reminds slightly of the last IMF crisis Labour were involved in. Effectively we are being told once again that we ‘cannot spend our way out of crisis’.
What did Milan Kundera say?:
“The struggle of man against power is the struggle of memory against forgetting”.
So, the question is, has the struggle ended today?
Or is it just beginning?
At the moment, I have a problem in deciding whether Starmer/Reeves even understand that Bailey’s current course of action will kill off any hope of growth. I also wonder if Starmer feels he has to keep his choice of Chancellor for this first budget, and then he’ll have a grand reshuffle.
But have they even tried to get the base rate reduced more rapidly, if they have and he hasn’t agreed, then there is a Constitutional Problem.
Does the mechanism exist to change the governor of the BoE before his time is up?
If they did change him, is there a suitable replacement?
All things are possible with compensation payments
Thank you.
It would not surprise me if Cooper and Balls get their friends and former power couple Minouche Shafik and Mohammed El Erian to be considered. They have before.
Rich,
A genuine question and in no way intended as a snide remark.
Do you actually believe that Starmer or Reeves want lower interest rates? I, for one, don’t!
I don’t think they have the competence to answer the question
@John
I hadn’t really thought about whether or not they actually want lower interest rates. But, on reflection, I have to wonder if either realise and truly understand the impact that the high rates have had on the lives of many ordinary people. However, I also now doubt their decision making capabilities across the board, which I find very worrying to even contemplate, particularly with the looming US election. Some degree of chaos seems certain and that will have both economic and supply chain impacts – I now doubt that this government will be up to making sensible decisions if the chaos is really bad. I pray I’m wrong and that everything will be fine, but ……
Imagine if the Government and BoE met just once every 5 years to set the rate for the next 5 years (or maybe every 10 with a 5 year review). Industry and individuals could actually plan, the Monetary Policy Committee would be made redundant and money creation and tax would become the go too method for stimulating and cooling the economy
I have to say it has to be a bit more flexible than that.
“Canada’s inflation, like that of the UK, is falling fast. It hit 1.6 per cent in the year to September. Prices are, however, falling because economic activity is slowing.”
If Canada has an inflation rate of 1.6%, then Canadian prices are not falling but only rising more slowly than they were…
So, relatively the second differential is falling
Andrew Bailey keeps banging on about services inflation. The service sector is labour intensive with very large numbers of people on minimum wage. When minimum wage is increasing at a much higher rate than RPI then inflation in that sector is bound to be higher. Why is anyone surprised?
Good points on Canada
Check out the post WW2 inflation rates vs the Fed Funds rates and mortgage and Bond rates. There were negative real rates!!! Did the policy really cause a reduced inflation rate now given what happened after WW1 and 2???
https://www.researchgate.net/figure/Bond-and-Mortgage-Rates-1900-1953_fig2_239810464
https://www.usinflationcalculator.com/inflation/historical-inflation-rates/
https://www.fedprimerate.com/wall_street_journal_prime_rate_history.htm
Canada has dropped 1.25 in just a few months, but the rate is still higher than 10 year bonds which means we are still in a braking mode. It should be at least down to 1.75 .
Agreed