Yesterday saw something of a sharp about turn for the exchange rate of the UK pound sterling particularly against the US Dollar. After continuing its recent bounce-back to US$ 1.516 it then about turned and dropped over a cent and a half to below US $1.50 where it still stands. Such moves make one look for a cause particularly if a probable one then appears. Also if the effect occurs before the probable cause becomes public we also have the concern that some may have benefited from what is called the “early wire” or inside information. Or as George Orwell did not put it “some currency traders may be more equal than others!”
What happened?
The Financial Times published what it claims to be a scoop about what will be in the UK Budget on the 20th of March.
George Osborne’s Budget will pave the way for Mark Carney, incoming Bank of England governor, to come to the rescue of the economy as the chancellor sets the scene for a new era of looser monetary policy.
There are immediately two begged questions. The first is that if one can “rescue” the economy apparently easily why have we not already done it? Secondly as we already have base rates at 0.5%,some £375 billion of Quantitative Easing (QE) and now the Funding for (bank profits?) Lending Scheme (FLS) how much looser can it get?
We are given what appears to be a new buzz phrase although if we use our memories it is in fact rather recycled.
fiscal conservatism and monetary activism
Still on a day when Bonnie Tyler is announced as the UK’s entry into Eurovision perhaps recycling of the past is en vogue and fashionable! However if we recall “monetary activism” in its first incarnation we see that even Treasury Ministers like Justine Greening were clueless as to what it meant. Her interview with Andrew Neil on the BBC was a genuine video nasty from her point of view,although I note that as usual in our political class it was no barrier to advancement. Indeed as we look back we now see that what it actually meant was neither explained nor followed through on. Back on March 20th last year I noted that it had morphed into “Credit Easing” which was described thus.
Last autumn the UK government made various grand pronouncements about its plans for Credit Easing. …. It has now resurfaced but the £20 billion will only reduce interest-rates for small businesses by a claimed 1%
Remember it? Well that puts us in a small minority! But let us recall what happened. It was ended only some four months later (did it ever start?) and replaced by the Bank of England’s FLS which so far has been a damp squib in every respect apart from subsidising banks.
So we go forwards wondering if this in fact a type of political hot air and hype and wonder also if we might find that a wind turbine above the House of Parliament might find a spot of perpetual energy. Reinforcement for this comes from this part of the scoop.
Options include giving the monetary policy committee greater time to bring inflation back to the 2 per cent target, giving the BoE a Federal Reserve-style dual mandate to target both employment and inflation, and even targeting cash spending in the economy rather than inflation.
So the options include the options which were already available? Thanks for that.
Bank of England Independence
Regular readers will be aware that I have been writing for some time now that the Bank of England gave up its independence when it had to seek the Chancellor of the Exchequer’s permission to start QE. It end-gamed itself then. But we now see that the Chancellor feels able to apply severe pressure via a Financial Times scoop whilst the Monetary Policy Committee is actually having a meeting! Something along the lines of a new broom is coming lads get with the programme?
This bit looks a little out of date now.
The 1998 Bank of England Act made the Bank independent to set interest rates
Mind you there was also this too.
The legislation provides that if, in extreme circumstances, the national interest demands it, the Government has the power to give instructions to the Bank on interest rates for a limited period.
Unfortunately the MPC simply looks yet another expensive and useless Quango which serves the role of taking the flak on politicians behalf. Or if you put it another way how would UK monetary policy have varied if we hard direct political control? It has already been extremely loose and I note that the scoop seems devoid of actual measures.
Wherefore intransigence?
On those lines this bit seems very curious to me.
Treasury officials are discussing proposals to change the remit of the bank to coincide with the arrival of Mr Carney as the governor in July, reflecting frustration at what was seen as previous BoE intransigence.
Policy could hardly have been much looser! More political spinning and pressure is at play here I think. After all no actual alternative policy has been presented has it?
Comment
As I review this “scoop” I see a lot of pressure and hype but much less beef in an odd replication of our ongoing food scandal. There is a possible genuine change if we were to move to more of an “employment and inflation” mandate like the Federal Reserve in the United States but even this would be more theory than practice. It was only on Tuesday that I quoted David Miles of the MPC saying this.
The remit allows inflation to deviate from target if this avoids excessive fluctuations in output.
So in practice even here we may ask what would really change in practice after such a move?
The Pound’s exchange rate
It feels these days as everyone in the UK establishment is trying to talk down the pound. Perhaps they remember the old Bank of England rule of thumb that a 4% fall in the trade weighted exchange rate is equivalent to a 1% cut in interest rates. Yes the same rule that the Bank of England and Governor Mervyn King in particular apparently “forgot” when the pound fell by 20/25% in 2007/08.
Since the last MPC meeting the pound has fallen by 4.4% versus the US Dollar so we can anticipate a further boost to inflation to inflation from this via commodity prices unless we are very lucky and they fall. Whatever happens UK inflation will be higher than it would have been. But this also has a contractionary influence on the UK economy via its impact on the level of real wages which we see from the latest wage data.
Between October to December 2011 and October to December 2012, total pay (including bonuses) rose by 1.4% and regular pay (excluding bonuses) rose by 1.3%
So we see that wage growth is in fact slowing and accordingly a boost to inflation will push real wages even lower.Thus domestic demand will be weakened and the policy will fail to work just like it has so far. Was it not Snoopy from the Peanuts cartoons who would lie on his kennel and wail “When,when,when, will I ever learn?”
I would make UK policymakers do the same. A bit like the opening of the Simpsons cartoons with Bart Simpson chalking his lines on the blackboard.
I will update later if anything significant happens but for now I have not changed my view on what will happen which is that I expect more QE but not today. However it will be tight and there are even scenarios where Mervyn King’s casting vote could come into play….
