This week is a crucial one for the UK economy as the Monetary Policy Committee (MPC) meets on Wednesday before announcing the results of its deliberations on Thursday. If we add some recent poor economic data to an MPC of which 3 members out of 9 voted for an extra £25 billion of Quantitative Easing (QE) last time around then we have to start to wonder if the 3 will grow to the necessary 5 to enact such a policy. Added to the mix was the data yesterday about the Bank of England’s prized Funding for Lending Scheme which is turned out has provided some £14 billion of cheap funding to our banks so that they can lend some £2.4 billion less. Yes less is the new more!
Rewards for failure in banking continue
This was announced by the Bank of England yesterday.
Spencer Dale, Executive Director, Monetary Analysis and Statistics, and Chief Economist at the Bank of England, has been reappointed for a further three-year term as a member of the Monetary Policy Committee with effect from 1 June 2013
Let me give you two good reasons why this should not have happened.
1. He has been Chief Economist when the Bank of England’s forecasting of the economy has been dire. Frankly their forecasts have told us what is not going to happen!
2. He gave a speech telling us his priority was “Inflation,Inflation,Inflation” in September 2010. However on his watch some 54 out of 60 official inflation readings have been over the 2% target including the last 41. Since the speech? All of them!
So another banker rewarded for failure. Indeed handsomely rewarded at £187,800 plus pension.
Talking of failures: Funding for Lending Scheme
This is the flagship scheme that the Bank of England has for the UK economy and its spinning of its success has been that of a Whirling Dervish. The actual documentation on its website was always cautious as you can see below.
The FLS aims to encourage more lending to the UK economy than would have been the case in the absence of the scheme.
After the debacle of the promises over QE I guess someone learnt something but this was not repeated everywhere. From the MPC Minutes over the past few months.
But there had been encouraging signs concerning the effects of the Scheme, which so far appeared to be operating largely as the Committee had anticipated.
a further easing in credit conditions supported by its programme of asset purchases and by the FLS
early positive indications
On the household side, that response had been positive
the improvement was particularly pronounced
encouraging signs concerning the impact of the Scheme had continued to emerge.
Let us examine the “encouraging signs”. Bank lending fell by £2.4 billion in the last quarter of 2012 compared to the third. In addition the two taxpayer supported banks (RBS and Lloyds) have cut lending by nearly £8 billion over the period of the scheme.
Perhaps by encouraging signs they actually meant this.
The FLS incentivises banks to boost their lending by reducing bank funding costs
So we have cut banks funding costs by providing £14 billion cheaply as they have cut lending! As I pointed out on the 18th of February this looks ever more like a (poorly) disguised attempt to subsidise the banks one more time.
Meanwhile savings rates have fallen in response to the FLS. The Bank of England measures the interest rate for new savings (Time Deposits) business and it has fallen from 3.11% in July 2012 to 2.14% in January. So we see that the scheme has to provide a boost to lending just to offset the impact of falling interest rates on savers.
As lending has fallen and savers are poorer the economy may actually end up being worse off! Well apart from the banks of course. It is always them isn’t it?
Inflation is (almost) everywhere
The problem for the Bank of England is that expectations of inflation are as important as its current level and its continual failure has meant that its credibility has collapsed amongst the general public. Indeed some members of the MPC seem set on making this bad situation even worse. Take this from David Miles in a speech last month
The remit allows inflation to deviate from target if this avoids excessive fluctuations in output. There are no explicit guidelines for the period when inflation needs to return to target.
Seeing as he was appointed to the MPC David Miles has seen inflation quickly rise above target and the remain above it. However his utter failure in this regard seems to bother him not one whit as in spite of it being above target and rising he feels this.
a good case can be made for more expansion
The expansion his policies have given us has been in inflation as over his time period there has been very little growth. We have had approximately 3% of growth whilst inflation has managed that each year on his watch as we see in which measure his policies have given us “expansion”.
Whilst they may have been able to fool some people it looks as though fewer and fewer are being fooled. From Decembers Inflation Expectations Survey.
Asked to give the current rate of inflation, respondents gave a median answer of 4.4%, compared with 4.1% in August.
In Bank of England speak such rises are described as “well-anchored”.
As ever energy prices are an issue
From the Financial Times
UK natural gas prices soared on Monday to their highest in seven years, as problems at a gas processing plant in Norway squeezed supplies and raised fears of higher household energy bills.
Actually that is a little behind the times as my provider First Utility wrote to me last week to say that my energy bills would rise by 9%. This reminds me of the issue of institutional inflation in the UK where virtual monopolies seem to manipulate the market. After all the price of Brent Crude Oil has been falling recently and aren’t gas prices in the United States much lower? How about shipping some over here?
Instead we in the UK have had this according to the FT.
The average dual-fuel bill has more than doubled over the past nine years, from £522 in 2004 to £1,352 this year, according to uSwitch.com, with the UK’s “Big Six” energy suppliers blaming the increase on the rising price of wholesale gas.
Seems like a rigged game to me.
As today is warmer there should (hopefully) be a release in the short-term and spring is on its way. But by next year climate change rules mean we will have scrapped some coal fired power stations as for example Didcot A closes this month. What happens then,particularly if the wind does not blow? No doubt “it could not possibly have been expected”.
After poor readings from our construction and manufacturing business surveys today’s services reading was a considerable relief. At 51.8 the largest part of our economy is edging forwards and means that we have economic growth if only just.
Also retail sales were solid. From the British Retail Consortium.
UK retail sales values were up 2.7% on a like-for-like basis from February 2012, when they were down 0.3% on the preceding year……Excluding distortions caused by the timing of Easter in previous years, total sales grew at the fastest rate since February 2010 (4.5%). Like-for-like sales growth was the fastest since December 2009.
If we consider what the MPC will do on Thursday I think that the vote may well tighten but will most likely end up with unchanged winning. This is partly for technical reasons as there will be some £6.6 billion of QE as a maturing UK Gilt is reinvested which will give an excuse for those looking to exercise what Sir Humphrey Appleby called “masterly inaction”. But as we edge forwards we face the prospect that every initiative and option that they have tried has failed. Or rather failed if you think that raising economic growth rather than giving hidden bank subsidies was the objective.
Whilst the Bank of England virtually always discusses easing let me end today by putting a fly in their ointment. There is a Shadow MPC which has already met for March and they concluded this.
the Shadow Monetary Policy Committee (SMPC) decided by five votes to four that Bank Rate should be raised on Thursday 7th March. Three SMPC members wanted an immediate increase of 1⁄2%, while two advocated a rise of 1⁄4%, implying a rise of 1⁄4% on normal Bank of England voting procedures.
I will return to this subject but will leave you with this thought, such a policy is rejected by those who have failed and are failing and sadly look likely to fail.