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What have we been up to


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Mixed signals from the MPC 

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Most eyes have remained fixed on the Brexit negotiations, and the government’s increasingly speedy retreat from the hard version that had been outlined by Prime Minister May in her Lancaster House speech. Last week, David Davis, the chief negotiator, gave up on the pretence that he could force the EU to combine discussing the divorce bill with agreeing a new trade deal and Theresa May did a pretty woeful job of delivering the basis on which EU citizens may remain in the country. She appears to be making another effort to produce a more detailed and cleaned up version today. 
However, the most extraordinary change has been in Philip Hammond. A couple of weeks ago, in the lead-up to the General Election, he was regarded as the proverbial dead man walking with the only uncertainty being who would replace him as Chancellor. Now he is leading the charge for a soft Brexit with his quip about how nobody voted in the EU referendum on the basis that they would be poorer being one of the few Brexit quotes to strike a ready chord. Now the Economist is writing him up as the most appropriate replacement for Theresa May – although admittedly as a stop gap with a pre-agreed maximum period.
The spat which we found most interesting last week revolved around the ultra-loose monetary policy that has been followed over the past several years coming home to roost. The impetus for this debate was Mark Carney’s Mansion House speech on Tuesday, having been delayed by the Grenfell Tower tragedy. The headlines in the media ran along the lines that there would be no rate increase until after Brexit. Given the time that these negotiations might take, this would have been a very irresponsible statement and after closer examination, it would appear that “now is not the time to begin that adjustment “ is the only clue he gave on the timing of a rate increase.
It came as a surprise, therefore, when, the very next day, Andy Haldane, the Bank of England Chief Economist, made a speech in which he announced that he planned to vote for a rate hike “relatively soon”. Having gone through the case for both increasing rates and for leaving them unchanged, the key reason for his leaning towards a rate hike was that a hike now  would avoid the position where rising inflation ”could result in a much steeper part of rate rises later on”.
One has sympathies with both views, as the increasingly hard-pressed consumer is not in a position to take on higher interest costs as well as reductions in real pay levels. Equally, Andy Haldane clearly believes that the march over the last couple of years to ever weaker monetary policy has been a mistake. Certainly, the failure to reverse the package of rate cuts and yet another tranche of QE, which the MPC were panicked into following the EU referendum – and which has since been shown to be totally unnecessary – was a major error.
The final speech by an MPC member came on Thursday from Kristin Forbes, the retiring independent MPC member who has voted for a rate hike at the last three meetings. Her point was that the voting by the Bank of England representatives on the MPC was extraordinarily consistent with that of the Governor.  Given that independent members have frequently voted against the Bank majority cabal, it was difficult to make the case that they were always voting according to their view on the economy/inflation. She, very nicely, came up with the wider and differing responsibilities that the Bank of England now has, that do not give them the time to study the impetus of their decisions. As she put it, “as central banks have seen their remit expanded to include a broader set of considerations and have played a more public role, this could make them more hesitant to take away the punch bowl and make the difficult decisions that can be required to keep inflation stable”. She was, however, particularly critical of the failure to reverse the August 2016, post-EU referendum package, once the economy had shown that it was performing reasonably well.
If Andy Haldane does vote for a rate hike while Mark Carney and his Bank of England colleagues stick to a ‘no change’ position, it will be a brave move as it will be the first time that any Bank member of the MPC will have voted out of line with the Governor since 2013. Indeed it is tempting to think that one might as well give Mark Carney at least three votes and spare his two deputy governors (with another one due to be announced soon) the bore of having to turn up for the meetings.
The concerns over central banks keeping rates at too low a level is not just restricted to the UK. This weekend the Bank for International Settlements (BIS) warned against central banks generally (although it is difficult to believe that the ECB was the main target of their warning) keeping rates too low for too long.  The BIS has cried wolf on this subject before as soon as there have been signs of debt levels starting to pick up, particularly in markets that are likely to rapidly lose liquidity in a downturn.  However, with the sight of Argentina being able to raise a 100-year bond at 8%, one cannot but have some sympathy for their view.
Relevant economic releases are thin on the ground this week. The household borrowing figures are out on Thursday, with consumer credit expected to remain steady at £1.5bn. However, the Bank of England is publishing its bi-annual Financial Stability Report tomorrow and many are expecting this to herald some action to try and halt the 10%-plus growth in consumer credit that has been seen this year. This will most probably be achieved by lifting the capital buffer that banks must set aside back to 0.5%. While this would impact on all lending, some analysts are also expecting the Bank to make specific recommendations directed purely at consumer credit.
On Friday the market is expecting the ONS to confirm the estimate of GDP growth at 0.2% in the first quarter, although some have hopes that it may be improved a notch.  Also on Friday, the latest balance of payments figures are announced and are expected to show a deficit of circa £17.0bn. While the CBI survey of last week showed a buoyant picture of UK manufacturing boosting exports, it is not yet showing through (in comparison with imports).
Back to Brexit watching…





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