Last night Mervyn King gave an interview to ITV News which was broadcast in its early evening and night time news programmes. Unfortunately in the gap between recording and broadcasting the interview there were some substantial moves in UK financial markets particularly in the pounds exchange rate and in interest rate markets. For example the pound surged when the normal market consensus was more in line with a report released by HSBC that it would fall against the Euro and drop to US $1.46. Instead yesterday afternoon saw a new macho supersoaraway pound which took off like a rocket from US $1.493 to touch US $1.51 and we also saw a gain of a cent against the Euro to 1.16. Also UK interest rate futures (confusingly called short sterling and my old stomping ground) were sold off in heavy selling and fell by 0.04. I know that sounds a small change but in these markets that is significant. I was also reminded of an option call spread which had been sold in large size earlier this week.
What did that make you think Shaun?
Suspicions then arose that the interview with Mervyn King would be bullish for the UK economy (leading to weaker interest-rate futures) and also for the exchange rate of the pound.There was already food for thought here and just to give you an idea of the scepticism in some quarters that such a statement would be made a former Monetary Policy Committee member Andrew Sentance promised to eat his hat if it was. I hope it is tasty!
If we look back we can see why this might be considered a significant change. After all it was only in February that Mervyn King had voted for an extra £25 billion of Quantitative Easing in the UK economy on the grounds that its prospects were weak. Also back last November he told us that the rally in the pound that had taken place was “unwelcome” which in the esoteric and arcane language of central bankers is virtually an invitation to sell!
So as you can see from his past statements a bullish pro-sterling interview would be a surprise to say the least.
What did Mervyn King actually say?
The tone and theme is set here.
Recovery is in sight
Also when probed on the exchange rate of the pound he said this.
We are moving to a properly valued exchange rate, I think we are there
Which was then reinforced by an unequivocal statement.
We are certainly not looking to push sterling down
Unfortunately we were the misled which is a common feature of interviews with Mervyn King and those less polite than me might call the next bit an outright lie.
The ability of the UK to rebalance its economy by exporting is going well
You do not have to take my word for this let me quote from a speech by one of Mervyn King’s colleagues at the Monetary Policy Committee Martin Weale.
the balance of trade measured in current prices is now not much better than it was in 2008……the growth in net exports following from the depreciation has been weaker than I would have expected
But at the same time, the impact (of the 2007/08 fall in the pound of circa 25%) on export volumes has been disappointing. The gain compared with 2008Q1 is small
So is “small” the new “going well”? As the speech was less than a month ago then perhaps Mervyn is getting a little forgetful at his age or he deliberately forgot it.
If we move on Mervyn King then adopts a very familiar policy which is to say the news is good if we ignore all the bad bits. Even the famously occasionally and temporarily blind Arsene Wenger would struggle with that one! If we ignore the bits which are shrinking and only count the good bits.
We are growing at 1.5% per year
On that basis AVB could declare that Spurs won one-nil last night at the San Siro!
In the transcript published Mervyn King did something familiar which is to completely contradict himself.
We need a big shift of resources towards exports, towards manufacturing and business investment
But Mervyn exports are “going well” aren’t they? Those who follow the use of the phrase “on track” and have pointed out the lack of its use in the UK I am sorry to tell you that this is no longer true and the emphasis is mine.
That balance has to be changed. Policies are in place to achieve it. We are on track to achieve it
For newer readers who have no followed the dreadful track record of this phrase its use in the Euro area has become associated with economic collapse and soup kitchens and usually quite quickly too.
Does Mervyn King have a good record in predicting things?
No, in fact it is dreadful! He has been part of a Bank of England operation which has developed a shocking forecasting record such that you look at it now only to know what will not happen. Indeed if we look at past interviews with ITV News we can go back to the 6th of October 2011 for some insight on this.
We’re past the worst
essentially from our point of view low inflation
Since then the economy has not grown and may in fact have shrunk but inflation has. Indeed the official inflation measure called CPI has been over target for every month since and if anything is accelerating right now. This does matter because nearly a year and a half later we are now in the period where Bank of England promises should come true for an interview given in October 2011.
Also there was an even more significant error tucked away in that interview.
Slow but steady increases in real take-home pay will start to come through
Instead it has continued to fall and the latest estimate is that over the credit crunch period it has totalled some 7%. This has been a strong contractionary influence on the UK economy and a reason why Mervyn King’s policies have failed.
If anybody from the Financial Services Authority is reading this and after all there are several thousand of them and the daily “Hear no evil,speak no evil,see no evil” meeting might be over they should take a close look at what happened yesterday. Whilst events happening at one time may not be related to others this is potentially so serious and indeed transparent that I would be all over it like a rash if I was in charge of the FSA.
To the layperson this may not seem that significant but the nature of the change and the involvement albeit unwittingly of the Governor of the Bank of England means that you cannot have suspicions of some having the “early wire”. As Pink put it.
If we return to the UK economy we see that whatever Mervyn King said is likely to be wrong. As I have demonstrated today he has been forecasting low inflation and a recovery for some years now which kind of extends the Arsene Wenger analogy does it not? However some good has come out of it for now as the rally in the pound is welcome and as I type this we are at US $1.513 and Euro 1.161.
The Bank of England elsewhere
The Bank of England has reviewed itself on the subject of inflation forecasting where its record as discussed earlier has been appalling. But in true Quango fashion it has in essence apparently missed this and the most common phrase from the report is below.
No change to current practice is planned
I wonder how much the Stockton review cost to reach this conclusion?
Here is an area where I would like to agree one hundred percent with the Bank of England as tucked away in its Quarterly Bulletin is this.
In the mid-2000s, there was a dramatic increase in the value of private equity sponsored buyouts of UK companies. Aided by loose credit conditions, the leverage on these buyouts, in particular on large deals, was high.
In my view this is yet another shark in the water and I would be interested in readers thoughts as to the implications and what we can do. Otherwise we are in danger of yet another “surprise”.