Posts Tagged ‘mpc’

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It is the new way of doing central banking. It is called forward guidance. It means that central bankers are telling us what they are going to do in the future under different circumstances. In one fell swoop they have done away with an industry; an industry called predicting interest rates. It has become a game, and in some cases a business. The media fill their pages with predictions on which way interest rates are going next. Now we know, if the data says one thing, rates will go in a certain direction. Yet here we are, just a few weeks into the era of forward guidance, and already cracks are appearing. As for the markets, rather than becoming more stable and predictable, they have become more nervous than ever.

“I guess I should warn you, if I turn out to be particularly clear, you’ve probably misunderstood what I’ve said,” or so once and somewhat famously said the former Chairman of the US Federal Reserve Alan Greenspan. This was the era when Mr Greenspan was set on a pedestal so high that it is a wonder he didn’t need an oxygen mask and climbing ropes. What the markets really loved was the way in which Mr Greenspan had a veneer of knowing something they didn’t know; of having a plan – a cunning plan if you will – that always worked the way it was supposed to.

The finance crisis of 2008, and the fact that we appeared to miss a meltdown in capitalism by a whisker did leave Mr Greenspan’s reputation a little in tatters. Ben Bernanke, his replacement at the Fed, made a great play of saying what he thought; of letting us in, as it were, on his rationale. At first it didn’t go down well. The markets concluded he didn’t really seem to know what he was doing. It is the tragedy of the modern age. All of us stumble around in the dark most of the time, but we just don’t like to admit to it. And when our leaders admit to it, we think they are weak and uncertain.

These days, however, Ben’s stock is high. It was he, first among the central bankers, who came up with the idea of forward guidance, when he revealed that the Fed would keep pumping money into the economy via QE for as long as unemployment remained high. Now they are all at it. The Bank of England – under the leadership of Mark Carney – is now saying that rates will stay at half a per cent as long as unemployment is over 7 per cent.

It is just that the minutes from the latest Bank of England Monetary Policy Committee (MPC) meeting revealed that one member of the committee – Martin Weale – voted against the policy. It was not so much the idea of forward guidance he was against, it was the perceived timing. He appeared to fear that the 7 per cent target was too loose. Er, or maybe you could say that actually he was against forward guidance, because he wants a policy that one might describe as always flexible.

His dissent is important, because it rather put a question mark over the viability of the policy. You can interpret the Bank of England as saying if the economy does this, we will definitely do that, unless, that is, we change our mind. There are also hints that UK unemployment is set to fall much more rapidly than has been assumed. A survey from the CIPD and the latest Purchasing Managers’ Index both point to positive changes in UK unemployment in the pipeline. See: The UK jobs market boost . This has led to speculation that rates might be rising much sooner than the Bank of England has been suggesting.

It appears that the industry that grew up predicting what the MPC might do next has changed into one predicting what unemployment will do. If nothing else, jobs have become a more important economic indicator – and maybe that is no bad thing; after all common sense suggests it should be the most important indicator.

In the US, recent data has pointed to a sharp improvement in the jobs outlook, with the latest survey suggesting US unemployment is now at its lowest level since October 2007.

So let’s review the situation. The signs, both in the form of hard data and from surveys, point to a labour market that is improving faster than many had dared to hope for. That means monetary policy might be tightened faster than many had feared. The markets are spooked by it all. ‘Better than they dared hope for’ jobs data turned out to be less of a boon than ‘rates rising faster than they had feared’, – at least that is what they are saying at the moment.

But then the markets are fickle and how they react one day can be quite different on another. If you think the markets are making themselves clear, it probably means you “misunderstood what they are saying”.

© Investment & Business News 2013

It’s two for the price of one. A new acronym, and a new (ish) idea. And QE, by the way, is so very 2012.

The thing about QE is that it is not really money printing. The Bank of England buys government bonds – not from the government – but from banks. But one day the bonds will mature, and when that happens, the effects of QE will go into reverse. Besides, there is another point. To acquire this money from the Bank of England, banks have to give up what is considered to a very safe and liquid asset – namely bonds.

Now if QE involved buying bonds at zero interest with no maturity date, directly from the government, that would be called creating money.

QE is not what they call helicopter money. It is not the equivalent of scattering money from a helicopter. It is more like scattering money from a helicopter, and sucking up certain assets from the ground at the same time.

What QE does do, is push up the price of bonds, making other assets look cheap, thereby either stopping certain assets from crashing, or indeed making them rise. So house prices or equities rise in price, and we may feel more confident and spend more, and businesses may invest more. That strategy does not work as well when the asset that rises is oil – or indeed gold.

But some say that the Bank of England needs to target its QE more precisely.

This is what happened in the US. Some QE was used to get rid of so called toxic waste from banks’ balance sheets and as a result – goes the argument – banks are in better shape. Some of it was used to buy corporate bonds, ergo – goes the argument – the US has seen a swifter recovery than the UK.

So what can the Bank of England do? Former MPC man Adam Posen wants to see it buy bonds in a kind of public bank, charged with investing into business.

Recently, Adair Turner – chairman of the FSA and one of the men who was at one point thought to be in the running for heading up the Bank of England after Mervyn King – called for what he described as overt monetary financing, or OMF. This is helicopter money, it is QE targeted at certain assets, and it is something Mervyn King is dead set against.

He said it’s not up the central bank to do such things, because then it would be engaging in fiscal policy. Rather, he says, it is up to the government. But the government wants to make cut backs. If the government spends money it is slated for being reckless. So we get £375 million of QE, and still the UK is limping along bottom.

Before we close, it may be worth reminding ourselves of words spoken by Adam Posen last year when speaking to the ‘FT’. He said: “I personally view the teeth-gnashing and garment-rending about what’s fiscal and monetary as too much drama for too little content.” He then added that the Bank of England holds “anguished religious ethics” about QE.

So maybe we need to move from QE to OMF. Or is that blasphemy?

For Lord Turner’s speech  discussing OMF, see: Debt, Money and Mephistopheles: How do we get out of this mess?

http://www.fsa.gov.uk/library/communication/speeches/2013/0206-at

©2012 Investment and Business News.

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Woe is us. The pound is crashing. You would need to rewind the clock back all the way to October 2011 to find the last time the sterling euro exchange rate was so low, or so was the case at 9.30 am 25 February 2013. Come to think of it, October 2011 wasn’t actually that long ago. But hey, let’s not ride against the tide, the media says the pound is crashing; that this is bad, so let’s run with the crowd.

Except before we do that, let’s turn to the minutes from the Bank of England’s MPC published a few days before Christmas last year. The minutes stated: “The gradual appreciation of sterling between mid-2011 and mid-2012, as prospects for the euro area had deteriorated, had been unwelcome.” Errr what was that? The appreciation of sterling has been “unwelcome.”  Can you say that a rise in the pound is bad, and a fall in the pound is bad? Does that add up?

The minutes continued: “Although the nominal effective exchange rate remained well below its pre-crisis level, some measures of sterling’s real exchange rate provided a less comforting view of the improvement in UK competitiveness. In particular, a measure  based on relative manufacturing unit labour costs was now only 10 per cent below its level in 2007, and just  5 per cent below its average in the decade prior to the depreciation. It was therefore possible that the real exchange rate consistent with current account balance might be lower than its current value.”

Let’s put it this way, back in December, the MPC had a wish for a Christmas present. Their letter to the man in Lapland said: “Dear Santa, please may I have a cheaper pound”.  Their wish was not granted in one go. But it has been granted in stages. Sterling fell in January, stayed pretty static for the first half of February, then – after Moody’s cut the UK’s triple A credit rating – fell some more.

From the point of view of UK plc we may be getting the best of both worlds. Because of all that talk of currency wars at the recent G20, neither the UK government nor the Bank of England are allowed to deliberately push the pound downwards. Well there is no need. Moody’s is doing the job instead.

All praise be to the credit ratings agencies.

Some say that this shows the UK is bankrupt; on the road to ruin. Why can’t we do things like Japan, which lost its triple A credit rating years ago, or the US, or France, both of which lost their top notch rating some time ago.

It is embarrassing for poor old George. Mr Osborne invested a lot of political capital in saying he had to follow the policies he was adopting in order to avoid the disaster of the UK losing its triple A rating. Now that rating is lost, it is quite hard for him to say: “it doesn’t matter.” Although in truth it probably doesn’t.

In part sterling’s fall is down to the view that other economies are picking up. The Fed has hinted that QE may be drawing to a close; China’s central bank is tightening monetary policy. The markets still seem to think, somewhat inexplicably, that the euro is past its worst.

Talking of inexplicable, some economists think the key to the UK’s recovery is lower inflation, so that wage growth outpaces growth in consumer prices. Others think the recovery lies with a cheaper pound giving exporters a lift. But since a falling pound will lead to inflation, you can’t have both.

The trouble with the UK exporting its way out of trouble is that such a strategy can only work if firstly, UK exporters combine their terms of trade advances with investment and productivity improvements, and secondly if demand abroad is growing.

The first condition requires more investment – something the banks seem unable to promote. Unless QE is directed more precisely, and targeted in the form of investment in companies, especially exporters and innovators, the first condition probably won’t be met. As for the second, there is nothing, absolutely nothing, that either the Bank of England or George Osborne can do about that.

©2012 Investment and Business News.

Investment and Business News is a succinct, sometimes amusing often thought provoking and always informative email newsletter. Our readers say they look forward to receiving it, and so will you. Sign-up here

One offs. In Monty Python’s ‘Life of Brian’, Reg said: “Apart from better sanitation and medicine and education and irrigation and public health and roads and a freshwater system and baths and public order… what have the Romans done for us?” The answer, of course, was “peace.”

Apart from rising food prices, petrol, gas bills, water, what makes you think inflation isn’t falling? To which the answer might come: “but even core inflation – with food and energy taken out – was 2.6 per cent last month.”

Okay, it’s not quite as catchy as Monty Python, but you get the point. How long must we suffer one-offs before they stop being called one-offs?

In fairness, there is not much of a relationship between monetary policy in the UK and the global hike in food prices. There may be a vague relationship with the price of oil and gas, because QE pushes up asset prices, and some speculators may buy oil as an alternative to holding government bonds. But frankly the relationship may be pretty flimsy.

But QE has influenced UK inflation in another way. It has pushed down on sterling. If it wasn’t for QE, it’s not unreasonable to assume the pound would be much higher in value today. The thing is that when a currency falls, there is kind of inflationary ricochet effect. The price of goods we import when our currency drops doesn’t all happen in one go. The price rises that occurred as a result of sterling falls in 2008 and 2009 are only just beginning to ebb.

Yesterday saw the release of the latest minutes from the Bank of England. Usually these minutes do little more than elicit the odd snore, but this time lurking in the minutes was pretty much the economic equivalent of dynamite.

It turns out that the Bank of England’s Monetary Policy Committee (MPC) is worried about the UK’s poor trade performance and while it accepts woes in the euro are have not helped, it also reckons that the pound is too high.

This is what the minutes stated: “Although the nominal effective exchange rate remained well below its pre-crisis level, some measures of sterling’s real exchange rate provided a less comforting view of the improvement in UK competitiveness.  In particular, a measure based on relative manufacturing unit labour costs was now only 10 per cent below its level in 2007, and just  5 per cent below its average in the decade prior to the depreciation.  It was therefore possible that the real exchange rate consistent with current account balance might be lower than its current value.”

Errr, to put it another way, manufacturing competitiveness is being hit by the price of sterling.

What does this mean? Well is that a hint that next year the Bank of England will put more emphasis on pushing down the pound?

The bank’s next governor  Mark Carney and the Fed – and indeed the Bank of Japan – are apparently coming around to the view that central banks should target nominal GDP – that’s GDP without allowing for inflation. So, it appears the powers that be are becoming more relaxed about the prospect of higher inflation in the short term in order to stimulate growth.

As for sterling, the runes seem to be pointing to falls in the pound in the year ahead.

Here is the snag. Japan’s new government wants a cheap yen. Brazil wants a cheaper real, and indeed its finance minister warned about currency wars two years or so ago now. China is not too keen on the idea of letting its currency rise, and some say Obama wants to destroy the value of the dollar. Oh yes, Greece, Spain, and at least half of the euro area desperately need a cheaper currency.

And by the way, on the subject of currency wars, Mervyn King recently warned of this danger too.

So there you have it, next year will be the year when all currencies will fall. It will also be the year when every team in the Premiership wins all its matches.

The alternative is currency stability. So what might currency stability do for us? Erm “peace”?

©2012 Investment and Business News.

Investment and Business News is a succinct, sometimes amusing often thought provoking and always informative email newsletter. Our readers say they look forward to receiving it, and so will you. Sign-up here