Posted by Huw Dixon Sun, June 24, 2018 19:27:47
Well, not much has happened in terms of interest rates since my last post in November: interest rates still stuck at 0.5%. However, excellent news that Jonathan Haskell is to join the committee. Well, there has been prevarication and procrastination. Interest rates were set to rise, and then not. Mark Carney continues to have a depressing effect on Sterling. His latest magisterial intervention was the interview with Kamel Ahmed on the BBC on 19th April. Prior to that expectations had been gathering for a 0.25% increase in interest rates. In the interview he stressed the possibility that increases might happen later rather than sooner. Sterling was then at $1.43. After that interview, Sterling fell and has continued to fall, reinforced by the May 9th MPC decision to keep interest rates fixed. Sterling is now at $1.33. The “Blame Brexit” P.R. campaign has been kept up. Of course, Brexit and weak growth have had an effect on Sterling, but I would suggest that Carney’s interventions have (as usual) talked down Sterling. Andrew Haldane voted for a rise in rates on 20th June (joining Saunders and McCafferty), leading to speculation in the press that maybe there will be a rise in August.
When I contrast the lack of forward guidance and clarity in what the MPC policy is, the contrast with the FED is complete. As early as 2014, the FOMC (the US equivalent of the MPC) had clearly laid out a plan. Raise interest rates, and then start to run down the holdings of Treasuries accumulated under QE. The interest rate rises started in December 2015, with the rate hitting 2% in June this year, with the possibility of more in the pipeline. The FOMC has regularly updated its policy statements on the issue and indeed at the end of 2017 it has started to slowly unwind QE by letting its holdings of treasuries and Mortgage backed securities decline. In contrast, the MPC has not issued a formal statement on interest rate policy and unwinding QE.
History will not judge the Carney governorship kindly. However, to look on the bright side, the Bank has started to talk about real interest rates. Gertjan Vleighe gave a speech talking about them last November. Excellent news. I am not sure I buy his idea that “low rates” can be a normal state of the economy (the example of world war two and the years just before and after has little relevance for today). However, once you accept the idea that the equilibrium real interest must be non-negative, it at least puts a floor on sensible nominal rates (they should be no less than inflation). Assuming inflation will be on target, that would imply nominal interest rates of at least 2%.
Also there is talk of Carney’s successor. Luckily the menopausal Broadbent has ruled himself out. In my opinion, the idea of a Goldman Sachs alumnus as governor of the Bank is not a good idea. There are some excellent people for the job: Sir Charles Bean (Mervyn King’s number 2) to name one. But why not go for a non-banking person. Kate Barker would make an excellent choice in my opinion. She is a leading business economist and was on the MPC from 2001 to 2010.