My home country the UK is exhibiting quite a few of my economic themes at the moment and we can start with Bank of England Governor Andrew Bailey. He was interviewed by West Midlands Life on Wednesday so we can start with a positive in that he got out of the City of London. But the interview became rather a classic of the genre.
AB: So, inflation is at the moment is above our 2% target and our job is to bring it down and there’s frankly a very delicate balance at the moment between the things that have pushed inflation up, the sort of what I call the underlying state of the economy that have been caused by a few things like water bills going up, vehicle tax going up. We are seeing food prices going up and we have seen some increase in the costs of employment because the national insurance changes. So that’s, you know, we’ve got to bring that down.
He covered a lot of ground there and presumably hoped the interviewer did not spot that the “few things” going up became rather a list.Later he made a further confession about his use of “few things”
AB: And it’s interesting with food because it’s very prominent. For the simple reason, we all buy it every week.
Also he could not quote anything that went down or he would have done. Plus you may note a shifting of the blame for higher inflation onto Chancellor Rachel Reeves. A theme he continues elsewhere.
SA: Yeah. Do you think that’s connected to the national insurance increase making employers less keen to take people?
AB: I think it is. I think that’s part of the story.
He has a point there as plainly the Chancellor did raise inflation via her Budget but anyone genuinely concerned about inflation would fear her doing the same this November. Thus would not be saying this.
I think there is still some further journey down in interest rates to go. But exactly when that will be and how much it will be will depend on the path of inflation going down.
Yet again he is pushing for lower interest-rates and hopes he can get away with claiming this.
AB: I think it is. I think that’s part of the story. Obviously, us having interest rates at 4% is part, to be honest, is part of the story. Policy is what we call restrictive at the moment. That’s because we’ve got to bring inflation down.
With inflation about to be around 4% that is not true as the old rule of thumb is that you need interest-rates 2% higher than the inflation rate. This brings in another of my themes which is that Bank of England Governors always get around to talking down the UK Pound £. This is what he is really doing here.
If we look at the effective or trade-weighted exchange rate we see that the dive of September 2022 took it below 74, whereas now it is above 84. So if we add in the anti-inflationary strength of the rally in the US Dollar to the mid-1.30s things were looking good. Except we are now at US $1.3360. Not all of the fall against the US Dollar is his fault as it has been supported by an upwards revision to US consumer spending and GDP. But he helped it along in a move exactly the opposite of his claimed words and actions.
The Governor is made to look out of touch
As it is Friday we can put this under pre weekend humour for us. The Governor tried to spin a yarn about his interest-rate cutting plans being due to a weak economy with an unspoken link to the output gap theory that not matter how often it is wrong reappears again. But he got rejected.
SA: I wouldn’t dare to question the Governor of the Bank of England. It’s just that I hear this statement about people aren’t spending so much. But I go out to a retail park down the road called Bentley Bridge and it’s often hard to get on the car park. On a. Any night of the week, the car parks are rammed, so there’s a cinema, there’s a few restaurants, bowling alley. So, somebody’s got some disposal income.
This is a very important point as modern economies have hot and cold spots at the same time. There are genuine measurement issues here in official statistics keeping up which are only added to by the way that the Office for National Statistics has made such a mess of things. I realise it is very out of fashion these days but one can have sympathy for the Governor on this issue whilst also noting two clear problems.The first is he is using the labour market where we know the data is particularly troubled.The second is the reality that it gives the answer he wants anyway.
It is a sad area of modern life that institutions with in theory access to a wide range of data and technocratic expertise do not use it. What I mean by that is the policy ( lower interest-rates) is decided and then research is made into areas to justify it rather than trying to learn from the research and then deciding on policy.
Bond Market Disaster
This is an area I am pleased I wrote about on Wednesday because it has come into the news with the Governor meeting the leaders of Reform. To be fair to Reform they have looked at this area although their policy prescription of stopping paying interest on reserves would backfire as this is how the Bank of England sets interest-rates and how it applies to you and I.
For today’s purposes let us mark the issue of the Governor’s gratitude to the Bank of Japan as otherwise he would clearly be the worst bond trader in history. But we can note that he repeated the central banking orthodoxy in his interview. In his world promises of lower interest-rates lead to lower bond yields whereas over the past year or two the real world has seen exactly the opposite of that.
AI
Readers have asked about this in the comments and from the horses mouth.
AI should help us. I mean, we should put it to work, in a sense. We’ve got to work out how to do that. So, we do use it.
How?
I use it sometimes to edit my speeches, not to write them, but because I actually find it pretty useful. I sometimes write a speech and it’s, you know, 500 words longer than the delivery time.
So we learn that he considers speeches to be more important than policy. Plus we are left wondering if the real reason it is not used for policy is because it might suggest a rise in interest-rates.
Comment
The UK establishment has conspired to raise inflation and now is in a mess. The Governor is cutting interest-rates as fast as he can. Plus we have a Chancellor who has done this.
>but that requires translating into (politically contentious) policy in the arena of indexing welfare, setting the National Living Wage rate, raising taxes that have low pass through to consumer prices (so not employer NICs…), public sector pay, & energy policy. Hopes that happens are…. low…. ( Simon French)
As you can see they fear more of the same and sadly I think they will be proven right.So this is a real challenge for the UK as it is the bodies which should protect us from inflation that have driven it higher than elsewhere.
Also in his speech the Governor inadvertently confessed to yet another institutional failure.For years central banks have pushed the concept of core inflation. Yet he confesses above that an area they told us to ignore, food prices ,is driving inflation with the previous burst also being driven by energy prices which they also told us to ignore. How much more wrong can you be?
