We have seen two recent pronouncements by leading Bank of England MPC members: Governor Mark Carney at the Mansion house and Chief economist Andrew Haldane in an interview with the Telegraph. But first, we have the very welcome announcement that the new committee member replacing Kirsten Forbes is a real economist, Silvana Tenreyro a Professor at the LSE. Just to explain why this is a welcome appointment. The Chancellor is responsible for the appointment, which is made through the cabinet office. Under George Osborne we saw a shift in the type of person being appointed. Out went established academics like Mervyn King, Charlie Bean, Martin Weale. In came “city economists” from investment Banks. Ben Broadbent (Goldman Sachs), Michael Saunders (Citi), Gertjan Vlieghe (Brevan Howard hedge fund). This is the first appointment under Hammond. It is like for like: a serious academic for a serious academic. However, I think we can heave a sigh of relief that it is not another “city economist”.
I see two problems with appointing more than one city economist to the MPC. There is the issue of regulatory capture. The Bank needs to be independent of the City. The Bank has a regulatory role to maintain financial stability: since the investment banks have been major sources of instability it is strange to have their people at the top of the bank. The Bank is supposed to be keeping inflation on target in the interest of the whole nation. Its current policy of allowing inflation to rise and failing to keep interest rates up with inflation (and hence plunging the nation into financial repression) might be interpreted as acting in the interests of the very investment banks and hedge funds from which the MPC members have come. Now of course, city economists are perfectly capable of doing the right thing. Michael Saunders is one of the three who recently voted to raise rates: respect. However, perceptions matter and there is the possibility of a conflict of interest. The next appointments will be a real signal, enabling Hammond (or his successor) to show that the Osborne era is over and that the MPC and Bank of England needs to be independent of the investment banks and the City. Mr Osborne of course has since become part of the city, with his appointment in February 2017 as part time advisor to BlackRock, the world’s largest investment Bank.
Mark Carney made what in my opinion was an amazingly reckless speech at the Mansion house. Inflation is currently just short of 3%, the upper limit of the range. Three members of the MPC voted to raise interest rates. The real implications of having interest rates at 0.25% whilst inflation is 3% are really hitting home to the public and politicians. Carney is of course distracting us by blaming Brexit. I opposed Brexit (as did nearly all economists), but it is rich for the Bank of England to blame inflation on Brexit when the Bank has done nothing to restrain inflation, which is its main job. Real interest rates have tumbled and now stand well below minus 2. The Bank’s own forecasts in mid 2016 predicted a rise in inflation to 2.8% by mid 2017. The surge in inflation was foreseen, but the Bank did nothing. In fact, it made matters worse by cutting interest rates by 25 Basis points post Brexit vote. A classic “Greenspan put” as seen in the run up to the 2008 financial crash. Now, almost 12 months on, his Mansion house speech was a loud and clear statement that “Now is not yet the time” for interest rates to rise. In effect, he is talking down sterling at a moment when inflation may well break through the 3% barrier. If it does go above 3%, I think that Carney should be made to step down. Keeping interest rates at near zero when inflation has risen by almost 3% is just stoking up some huge problems and possibly another crash. The correct policy would have been to start raising interest rates gently last year, with the aim of getting to a level of the inflation target plus 1-2%: that is 3-4%. The US Fed is doing this. Unlike Carney, Janet Yellen is a serious economist who understands these issues and has not spent time in an investment bank or hedge fund.
Andrew Haldane is a serious academic economist. In the recent Telegraph interview, he said “might have to rise this year to nip inflation in the bud and prevent a sharper jump in rates in future”. The phrase “to Nip inflation in the bud” is a bit rich: the inflationary horse has already bolted. Any bud nipping was due last year. The MPC needs to look ahead. Anyway, at least he is starting to think in the right way. More important is his statement “to prevent sharper rises in the future”. Yes, keeping rates so low can actually be a threat to the financial stability the Bank is supposed to be maintaining. Sharp rises in the future are just what is required to trigger a financial crash. Well said Andy! Raising interest rates has become not just an issue of avoiding financial repression and keeping to the Bank’s inflation target, but also protecting the very stability of the financial system.