The Bank of England Monetary Policy Committee reported yesterday on its thinking on inflation when cutting the base interest rate to 4.75 per cent, which, as I have already noted, was too little and too late.
Amongst the issues that the Bank commented on was the Budget. They came to four conclusions.
You could almost hear the tut-tutting as they noted that spending and planned revenues would be higher:
Then, they noted that government investment will be higher:
Additional public investment would, if sustained, be expected to increase the productive capacity of the economy in the long run.
They then added, as if with a note of relief:
The impact on potential supply of the public investment announced in the Budget is provisionally expected to be very small over the MPC's forecast period, and to build thereafter
They did the same on the changes in NIC and minimum ages, noting, cryptically:
The increase in employer NICs is assumed to lead to a small decrease in potential supply over the forecast period.
What they mean is unemployment will rise, which is always good news for the Bank of England.
Finally, they noted the impact on inflation:
They claim there will be a 0.5 per cent impact on inflation.
No doubt this helped them in making their forecast that Bank base rates will never fall much below 4 per cent over the years to come:
Net positive real interest rates remain on the cards, then. Labour has provided the Bank with the excuse it needs to continue with its foot on the brakes, whatever labour might wish with regard to growth.
None of this takes Trump into account, of course, or the disruption he might create. I expect nothing to work out as forecast.
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In a former life I used to look at the BoE reports and concluded that they were not really of much value – based on certain assumptions and as we all know forecasting is a dubious activity. The problem is that media tend to assume that the BoE is infallible. The BoE needs a bit of a revamp!
Thank you, Richard.
As I watched Andrew Bailey interviewed on the news yesterday evening, I thought of a speech he gave at the Swiss embassy a dozen or so years ago, supporting Brexit and Britzerland, an idea that Boris Johnson later supported, which helped Bailey’s candidacy for the top job,
I sat next to Hamish MacRae at the talk. We later retired to Wigmore Hall for a recital and reception. It felt surreal to hear that UK and Switzerland propose that, in tandem with Dubai and Singapore and perhaps the US, become the world’s bankers and use the threat of investor strikes to get what they want.
I know some former Bank and Treasury insiders who still wonder how Bailey became governor. They should, like I do, realise how good a politician he is, his US links (by way of his wife and where their second home is located) and the, ahem, favours he did as regulator.
I saw Bailey interviewed on C4 New last night by Ebrahimi who for once seemed a bit combative (mind you she has her image and sale-ability to consider).
At one stage he looked really uncomfortable and then – and I’ve learnt to read his body language I think – simply dismissed one salient point with the wave of hand and talked absolute crap at the same time to effectively end the conversation.
As you seem to suggest, a polished performer, a useful idiot to be put to use for the immense, unaccountable power that is the cause of our ills.
Thank you, PSR.
I first met Bailey in 2009, an office workshop to discuss an orderly liquidation of banks, and last in 2020, an evening discussion of capital markets reform and reception at the stock exchange, next to St Paul’s. Your observation is spot on.
I first met Ebrahimi about 10 years ago. She wrote for City AM, which Mervyn King rightly called the Sun of business journalism. She was called helium on this blog some months ago. That’s also spot on.
Johnson brought Cummings and Javid to discuss who should become governor. Cummings favoured Haldane. Former bankster Javid favoured Bailey. Johnson sided with Javid. Readers should wonder why former bankster Javid and Brexiteer Johnson did so…
I find MMT protagonists a bit odd on international trade, so I work on a very simple proposition:
In order for the UK to buy energy or goods priced in $US, we need to find someone prepared to exchange their $s for £s. The best way to do this is by exporting goods and services priced in £s.
I have read that 21% of UK exports are to the US and a prediction that a tariff wall will reduce this to 9%. If true, this would leave a fairly catastrophic reduction in our ability to buy $s and the attractiveness of £s.
The UK imports about 40% of its energy, priced in $s and this requirement is fairly inflexible.
If a less attractive £ falls in value, energy and other imports will become much more expensive, giving a spike in inflation.
At the same time, the loss of exports will lead to a reduction in jobs and a decline in GDP.
The Bank of England will stick to its fixed belief that all inflation can be cured by increasing interest rates to make the poor poorer.
I see a real risk of old-fashioned stagflation – high inflation, high interest rates, high unemployment, falling GDP. Leading to a good old-fashioned recession.
That is possible
I’m ever so suspicious of these tariffs. Firstly – they do work both ways. And while UK on its own might not be wielding much of a hammer, EU, China, Mexico and some others do. Secondly – where are the (properly educated) people going to come from who’re going to work producing all this stuff US is not going to import anymore? He’ll apparently deport three or four per cent of population in their prime and – most importantly – US don’t have the education system to sustain this new production short or mid-term (neither are they prepared to pay for it).
Can tariffs in their case do much else but lead to shortages and higher prices – which would then come together with ever-higher interest rates and block them for a for quite some time?
I have a feeling that the whole ‘deport the immigrants’ shtick is something like ‘building the wall’, an impossible (or at least unfeasibly costly) ‘policy’ which doesn’t have a chance of occurring. They will already be lining up the people they wish to demonise for the failure when it inevitably goes kaput. After the private security/prison companies have signed the contracts, no doubt, so they’ll still be paid.
The logistics of it are almost impossible to imagine and how would they even strip the citizenship of the hundreds of thousands or perhaps millions of children of these immigrants who were born in the US after their parents arrived?
I believe Trump is going to try to do it all this time
Why wouldn’t he? Who is there to stop him?
There are media reports that the judge in the 6th January Capitol seizure case has paused proceedings, and the special prosecutors are seeking to wind down the prosecutions of both the Capitol case, and the retained documents case. It seems likely the Supreme Court’s critical ruling over the Trump prosecution (https://www.supremecourt.gov/opinions/23pdf/23-939_e2pg.pdf) was decisive.
The Supreme Court opened its opinion by establishing that: “Under our constitutional structure of separated powers, the nature of Presidential power entitles a former President to absolute immunity from criminal prosecution for actions within his conclusive and preclusive constitutional authority. And he is entitled to at least presumptive immunity from prosecution for all his official acts. There is no immunity for unofficial acts”. (Supreme Court, Trump v. United States, pp. 5–43).
The last sentence appears to have ensured the case was not closed. The Court decision (a majority decision) was as follows: “The President enjoys no immunity for his unofficial acts, and not everything the President does is official. The President is not above the law. But Congress may not criminalize the President’s conduct in carrying out the responsibilities of the Executive Branch under the Constitution. And the system of separated powers designed by the Framers has always demanded an energetic, independent Executive. The President therefore may not be prosecuted for exercising his core constitutional powers, and he is entitled, at a minimum, to a presumptive immunity from prosecution for all his official acts. That immunity applies equally to all occupants of the Oval Office, regardless of politics, policy, or party. The judgment of the Court of Appeals for the D. C. Circuit
is vacated, and the case is remanded for further proceedings consistent with this opinion” (Supreme Court, Trump v. United States; p.42-3).
The Guardian reports suggests it is due to “internal justice department policy prohibiting the prosecution of a sitting president”, but , according to the Supreme Court ruling: “The Executive Branch has ‘exclusive authority and absolute discretion” to decide which crimes to investigate and prosecute, including with respect to allegations of election crime’ (Supreme Court, Trump v. United States; p.5); which post-election would mean the President will hold the absolute discretion. but I am not a lawyer and would defer personal, purely speculative interpretation and explication of this conundrum to an American constitutional lawyer, if any is willing to explain.
I understand why due to the ambiguity these cases might be deferred.
I hope they are not closed. I fear they will be.
Over the last few days i have never seen so many politicians, journalists and supposed ‘opinion formers’ rewriting everything. I shall not comment again on Trump’s triumph (I have said enough); but now we have the sad and bereft British neoliberal ‘intelligentsia’ attempting to equate the priorities of the US electorate with the British electorate’s choice of Brexit. In short, Trump’s triumph is proof that the electorate were right to choose Brexit.
Here is the reality: “Since the June 2016 EU referendum, our forecasts have assumed that the volume of UK imports and exports will both be 15 per cent lower than if we had remained in the EU. We assume that the resulting reduction in the trade intensity of GDP will lead to a 4 per cent reduction in the potential productivity of the UK economy (relative to remaining in the EU), with the full effect felt after 15 years” (OBR ‘Economic and fiscal outlook – March 2024’, p.38 box).
In short, the economy is shrinking by 4% of GDP, and the effect is long term. The worst has still to come, and it will be damaging our economic wellbeing, even after fifteen years. What the OBR does not do is spell out the quantum. The Government, politicians, economists and journalists through around big figures (£Bns) that spook and stress the British public. The Debt, the Deficit; or howmuch the Government is spending on the NHS, or Pensions. B ut they never, ever quantify (£Bns) for the cost of Brexit.
4% of GDP is GDP is circa £90Bn. This dwarfs all the figures for Government spend, or tax increases, or Budget changes. £90Bn shortfall, every single year is shrinking the economy on a scale that is beyond any government, or any private sector growth, fully to offset. It is not over. The worst is still to come. Brexit is the core problem it is destroying living standards and causing serious damage, across the board – to supply, to demand, to demography, to everything – and no government can change it, without revisiting a European customs union, or single market, or end of Brexit.
The US electorate is not in our predicament. It will not accept a shrinking economy; still less a self-inflicted shrinking economy. It is able to take this position because American exceptionalism still has purchase on the world. The US is the world’s largest economy, still; it possesses the world’s Reserve Currency, the world’s strongest military, and exercises most widely an exercise of political power throughout the world on a scale that is still unmatched.
Britain is not any of these things. The British electorate, however is so detached from reality it still acts as if it was all these things, and refuses to accept reality. It thought the tough part of Brexit was voting for it. The tough part – is living it. And living what Brexit means has only just begun. As the OBR suggests; the worst is yet to come; and the British people are an extermely ill-assorted, ill-managed community, providing little evidence they are equipped or prepared to handle the reality of the disaster they have inflicted on themselves; their children and grandchildren.
If you do not like this conclusion, then show how Britain is going to generate growth to recover £90Bn++ of lost economic activity every single year. Just how much growth could the British economy ever conceivably produce, every single year. Britain’s long term growth rates are in the 1.5%-2.3% range, and that is a prescription for total failure in the world of Brexit. Sustained growth at rates Britain, at the peak of its performance (when it had little serious competition) has never achieved, are now required as a matter of urgency. The economy has shrunk. We are operating near capacity. We have serious labour shortages in critical areas, we have a week industrial base, are over-dependent on imports, and austerity has been so endemic for so long , the infrastructure is grossly inadequate and is in serious disrepair.
Answers please, from the Brexit community preferably.
Thank you and well said, John.
I am just back from a week in Switzerland and note that any Brexit inspired loosening of ties is no longer on the agenda. The reverse is in process.
It was refreshing to be somewhere that works.
Well, it seems the Brexitati have gone AWOL. Two days – and nuthin’; they have disappeared. So now we know how to clear out the trolls, with an effective and convenient disinfectant; ask the Brexitati where they are going to find £90Bn – fast: rinse and repeat, because they have to keep finding it.
I need to bottle this.
Thanks for this analysis Richard/John
I wholeheartedly agree that Brexit was a disaster. But several points occur to me. Firstly, and I really must read the OBR report to be fair, we can’t just “assume” that with imports and exports down 15%, GDP will be down 4%. And, yes I know I am probably simplifying the report, but it surely has to be backed up with much evidence.
Secondly, with so much fossil fuel being wasted ferrying goods around the world unnecessarily, should we not be looking to reduce world trade anyway?
Finally, imaginative industrial and agricultural policies could offset the supposed damage to GDP. This is even more important given we know that in an increasingly unstable world supply chains become unstable and cause massive spikes in inflation when they falter.
John, that’s the finest, most excoriating analysis of Brexit’s damage to the UK economy, now and for the future, that I’ve seen. I suspect you’ll not hear from ‘the Brexit community’ at all. It also puts Scotland’s future within the UK into clear focus: stay in and go down with the ship or get out and shape our own economy and society to benefit the people of Scotland. A no-brainer if ever I saw one.
Thank you and well said, Ken.
A day or two ago I said that the people I come across in policymaking are not fit to lace the shoes worn by John, Mike Parr and Richard.
Can someone please enlighten me who is running this country ?
the government we voted for
OR
the Bank of England (representing the markets, City of London, financial institutions, etc.) ???
Thank you.
May I suggest that if one has to ask, it’s not us, the peasantry.
https://www.theguardian.com/business/2024/nov/10/from-thatcher-to-trump-and-brexit-my-seven-lessons-learned-after-28-years-as-guardian-economics-editor
Larry Elliott lists seven lessons he has learned from his time as the Guardian Economics Editor.
Despite his brief mention (Lesson 2 – Ideas Matter) of a form of “zombie capitalism” being “kept alive by cheap money liberally provided by central banks” after the 2008 “crisis of neoliberalism”, he can’t seem to bring himself to state the obvious – that the way that crisis was ameliorated, by money creation (along with the similarly financed massive spending of countries during the pandemic) gave the game away to anyone still alive after Covid, that it is money creation by central and commercial banks that “makes the world go around” (for states with fiat currencies and central banks) and not taxes.
It seems strange that he doesn’t list the open “money” secret described by MMT as one of his “lessons learned”, when the narrative of his article would suggest it should have been obvious to him.
Do we think he DOES understand this truth but has kept quiet about it (in which case, how did he hold his job down for so long)?
Or is he genuinely ignorant of where money comes from (in which case, how did he hold his job down for so long)?
He does claim that “one of the joys of working for the Guardian is that it encourages – indeed welcomes – challenges to the orthodoxy” – so perhaps we have to assume that it is IGNORANCE rather than dishonesty that is the problem. Otherwise he would have been explaining MMT to us for the last 16 years at least, wouldn’t he?
Of course, he could be lying…
I must write that letter, and send it to his successor.
I will raise it with him this week
I am going to his farewell drinks party