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Archive for the ‘Bank of England’ Category

Is Janet Yellen really a closet hawk?

My longstanding correspondent Ken Fisher, the West Coast money manager, has a typically contrarian take on how the new head of the Federal Reserve, Janet Yellen, should be regarded by the markets. In a column for the Financial Times, he says that, although an adherent of Ben Bernanke’s approach to monetary policy, she is in reality more of “a closet” hawk than a dove. This is essentially because while she supports QE, in practice that kind of monetary stimulus only forces down long term interest rates, inhibiting rather than encouraging banks from lending. She is also in favour of requiring banks to shore up their capital bases, which also inevitably tightens the flow of credit to the real economy and leads to slower than expected economic growth. Read the rest of this entry »

Written by Jonathan Davis

November 4, 2013 at 4:11 PM

The house price/general election nexus

One of the reasons I gave up being a full-time business journalist in favour of a career in investment was the fear that I might be falling prey to the all-pervasive cynicism to which so  many members of the media sadly seem to succumb over time. Excessive exposure to the doings of government can have that effect on you. I could not resist a wry smile however at seeing the attached chart, published by the economics pundits at Capital Economics. It shows the close correlation  that exists between house prices and the political fortunes of the party currently in power. As might be expected the relationship appears to be both powerful and close, and, I fear, is not at all accidental.  Political party strategists know full well that consumer confidence, in which rising house prices are the key component, holds the key to earning electoral victory.

chart2 house

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Change on the way at the Bank of England?

I have always liked the pragmatic approach to economics of the Financial Times Economics Editor Chris Giles, whose balanced pieces are a useful corrective to the doctrinally-driven work of most economists. His recent article in the Financial Times included this sensible comment on the most recent speech by Sir Mervyn King, Governor of the Bank of England, which I think was a significant milestone on the road towards what increasingly looks like a coming change in emphasis in UK monetary policy.

On Tuesday evening, Sir Mervyn King completed his slow conversion from being an activist on what economists call the “demand side” to a “supply side” pessimist. Where the Bank of England governor once saw monetary policy as a simple tool to reinvigorate spending and bring the level of output back to its previous trend, his speech indicates he now sees the pre-crisis period as infected by unsustainably overexposed bank lending and “unsustainable paths of consumption”. Read the rest of this entry »

Written by Jonathan Davis

January 27, 2013 at 8:29 PM

A dissenting view on inflation

Has the Bank of England lost control of interest rates? You won’t hear that view from any official source, but it is worth listening to the economist Peter Warburton, the founder of the consultancy Economic Perspectives, whose often dissenting opinions have been more right than wrong over the past couple of decades. He argues differently in this contribution to the Shadow Monetary Policy Committee’s latest review of economic conditions, in which he warns about the incipient threat of price inflation. It is well worth reading: I suspect it will look very prescient when we look back in years to come.

It is becoming increasingly obvious that the Bank of England has lost control of UK retail borrowing costs. During the three years-plus that Bank Rate has been set at ½%, the average interest rate paid on banks’ and building societies’ notice deposit accounts has risen from a low of 0.17% in February 2009 to 1.83% in July 2012.

Admittedly, the quoted monthly rates have bounced around, but the average for 2012 is 1.41%. This is a measure of the average cost of retail funds to the banking sector; the marginal cost is closer to 3%. On the other side of the balance sheet, Santander UK has recently announced a 50 basis point increase in its standard variable mortgage rate, to 4.74% from October. Clearly, the level of Bank Rate has played no role in the evolution of market rates for the past three years. The MPC’s consideration of a cut in Bank Rate is perverse and farcical in this context. As and when the UK economic news flow permits, Bank Rate should be raised in order to reconnect it to the structure of market rates. However, with UK activity indicators currently erratic and weak, now is not a good time to do this. Read the rest of this entry »

Written by Jonathan Davis

September 4, 2012 at 9:41 AM

Forecasts be damned

If someone told you that the end of the world was coming tomorrow, and the day passed without incident, would you be inclined to believe the same person the next time they came out with a piece of radical advice? I doubt it.  Yet one of the wonders of markets and economics is how quickly even sensible investors will switch their assumptions about the future without missing a beat.

The latest example of this bizarre phenomenon was evident in the Chancellor’s Autumn Statement. The independent Office for Budget Responsibility, run by Robert Chote, a formidably bright former economist colleague of mine on The Independent, has drastically reduced its forecasts of future economic growth. They are radically different from the forecasts the same body presented just a few months ago. Yet by some magical process they are already being treated as gospel truth. Read the rest of this entry »

Written by Jonathan Davis

December 3, 2011 at 11:30 AM

Danny Blanchflower: Not Out of The Woods Yet

Danny Blanchflower, the renegade former member of the Bank of England’s Monetary Policy Committee, made some powerful points in his presentation at the Association of Investment Companies annual conference for investment trust directors yesterday. This included more details on his differences and eventual showdown with Mervyn King, the Governor of the Bank, and other members of the MPC as the global financial crisis deepened in 2008. He thinks the threat of a double dip recession and even a debt “death spiral” remains very real.

As a labour economist, Mr Blanchflower has little time for what he sees as the flawed monetarist polices pursued by the  Bank, which he believes were overly theoretical and led directly to the Bank’s failure to anticipate the recession or cut interest rates quickly enough as the financial crisis unfolded. His analysis is pretty damning, and I believe well supported by the evidence.

Inflation targeting, the key plank in the Bank’s policy, is an inadequate tool in times like the one we have just lived through. The feeble policy of doing nothing to spike the development of asset price bubbles, originated by Alan Greenspan, and faithfully followed by the Bank of England,  has had disastrous consequences with which we will all be living for years to come.

Here are three of the key slides that Mr Blanchflower deployed yesterday.


The Bank’s reliance on outdated economic models that don’t work was perfectly illustrated in its June 2008 Inflation Report, just weeks before the Lehman Brothers collapse, which did not even mention the word recession and assigned a very low probability to the prospect of negative growth in 2009 (the left hand chart above). Mr Blanchflower’s arguments for more aggressive interest rate cuts fell repeatedly on deaf ears.

Compare that with the outcome (right hand chart above), with GDP falling by 6% peak to trough. Mr Blanchflower quotes J.K.Galbraith approvingly to this effect; “The only function of modern economic forecasting is to make astrology look good”. Two key reasons for the Bank’s failure are (1) that its models exclude the financial sector from its GDP forecasts and (2) they make no attempt to forecast interest rates, but merely take the interest rates implicit in market prices. Garbage in, garbage out, in other words.


The Bank’s latest forecasts continue to take market interest rate assumptions and presume the continuation of Quantitative Easing. On this basis they assign a 0% probability to GDP being negative in either 2010 or 2011 and a minimal probability that it will be negative in the years beyond. Its central forecast (most likely outcome) is for growth of between 3% and 4% over the next two years. Mr Blanchflower described the assumption of certain positive growth over the next as “incredible”.


His main objection to this assumption is that this kind of recovery has never happened in the past. In the United Kingdom in the 1930s it took four years for output to recover. The current slump, which has been almost as deep, is assumed to bounce back much more quickly, and without a double dip. What we are facing, in his view, is a “one in a hundred years event”. It is extremely dangerous to declare that victory has already been won. He expects QE to continue and for interest rates to remain at around 1% for five years.

He has a striking quote from Keynes, writing in 1931. “The duration of the slump may be much more prolonged than most people are expecting and much will be changed both in our ideas and in our methods before we emerge. Not, of course, the duration of the acute phase of the slump, but that of the long, dragging conditions of semi-slump, or at least sub-normal prosperity, which may be expected to succeed the acute phase”.

You can read a fuller account of his turbulent three years on the Monetary Policy Committee in the New Statesman, for whom he now writes a regular economics column. My view remains that his gloomy fears about future prospects will turn out to be overdone, and he is certainly no expert (nor I suspect would claim to be) on the non-linear relationship between economics and financial market behaviour. In keeping with thinking on the Left, his view is that public spending alone can keep the recovery going until or unless the private sector revives.

That is a contentious conclusion. But nobody should doubt that real risks remain, and his track record in identifying one of the major contributory causes of the crisis makes his views well worth studying.  His conclusions in any event about the Bank’s reliance on unreliable macro-economic models are undoubtedly well-founded.

Written by Jonathan Davis

April 21, 2010 at 4:17 PM