The Bank of England can “not rule out” that the UK will have “GDP falling for three successive quarters”

Yesterday saw the publication of the minutes from the latest meeting of the Monetary Policy Committee of the Bank of England. This body sets UK interest-rates and monetary policy. Tucked away in these minutes was something of a bombshell and I repeat it below.

the Committee could not rule out the publication of official data showing GDP falling for three successive quarters.

This statement poses a lot of questions for a body which has undertaken an enormous and indeed unprecedented amount of monetary easing to try to stop such outcomes. If we look at the minutes and look forwards we see that they fear this.

In the second quarter, some activity was likely to be lost because of the extra bank holiday associated with the Queen’s Diamond Jubilee celebrations.

The problem with this is of course that we were told last year that the Royal Wedding and the associated bank holiday would boost the economy! It would seem that extra bank holidays are like the weather which is always too hot or too cold and never the right temperature,unlike Goldilocks porridge.

What is worrying them?

If we look at what has happened then they are concerned about this.

The ONS had also revised down the path for household consumption during 2011 such that the level at the end of the year was 0.5% lower than previously estimated.

Indeed considering the Bank of England’s view on saving they were probably also troubled by this.

this implied a sizable revision upwards to the estimated household saving rate. This now appeared to have fallen back only modestly since its peak in 2009.

How dare households consider it prudent to save when Charlie Bean in particular of the MPC wants them to emulate the famous statement of an early winner of the Pools.


Why this should not have been a surprise to them

Here is their view on wage rises.

Whole-economy average weekly earnings had risen by only 1.4% in the three months to January

And here is their view on inflation

seasonally adjusted annualised monthly inflation rates were somewhat higher than the inflation target.

Let me help them out. At that point their official inflation measure was at 3.4% so real wages were falling at 2% per annum. Those who have followed this weeks events will know that real wage growth has moved even more negative and that this is something which troubles me greatly. Let me repeat this from yesterday’s update.

Total pay (including bonuses) rose by 1.1 per cent on a year earlier, down 0.2 on the three months to January 2012.

So if we factor in the latest official inflation numbers we see that our estimate of the rate of fall of real wages has risen to 2.4%. I already thought that this would be a brake on our economy but if we add in the increased savings rates discussed above we see that it is not a surprise that our economy is weak and even worse this does not look likely to change.

For the MPC though there is the problem of this being a surprise due to their persistent underforecasting of the likely rate of inflation. If we had inflation at the level of their forecasts this would be a much smaller problem. In a roundabout way they do address this issue in their minutes.

But, as with all forecasts, there was a large margin of error around them.

I find it hard to read that sentence without placing the word our between all and forecasts,although some suspect that the mistakes have not been errors at all!

Another problem

Readers of this blog will be aware of the rises planned in some UK mortgage rates with those on standard variable rates (SVRs) particularly affected. For those unaware of the situation in the UK SVR’s are often the default mortgage rate and as credit criteria have tightened more borrowers have been moved onto them. These rises start in May and are spread through the summer/autumn.

The Bank of England has spotted this

The impact of past increases in costs for UK banks of raising retail and wholesale deposits had been continuing to feed through into higher borrowing costs for some households and businesses.

I am not entirely convinced by the first part of that sentence as I consider it to be spin by the banking industry but the latter part is true. Also we see this.

Some further rise in spreads on loans to businesses had also been expected.

Let us step back for a moment and consider what Quantitative Easing was supposed to achieve

From the Bank of England website.

That lowers longer-term borrowing costs

So it has spent approximately £315 billion on UK Gilts (government bonds) to achieve this aim except as in its own words above it is not currently working.

Even worse if we move on from the price of credit as expressed by interest-rates and move onto the quantity of it we see that there are problems there too.

Respondents to the Bank’s latest Credit Conditions Survey had expected some further tightening in credit standards for secured borrowing by households, although less so for unsecured borrowing.

What about inflation?

This has become a perennial problem area for the MPC as it finds inflation always doing this.

If anything, the decline in February had been marginally less than the Committee had expected

As the latest inflation report had been in February we see that not only is the MPC unable to forecast inflation it does not know what it is at any period of time. Perhaps they are catching on a little though.

There was a risk that inflation would fall less rapidly in the near term than the Committee had anticipated

Although “fall less rapidly” metamorphosed into a rise in reality.

A Theoretical Problem

For three years now the Bank of England has persisted with an “output gap” theory of inflation and it still seems to believe in it as shown below and the emphasis is mine.

how rapidly domestically generated inflation would fall in response to weaker cost and price pressures from a recovery in productivity growth and the margin of spare capacity.

If this were true we would have undershooting inflation but reality has been different. If it has any effect it has been weak and the MPC should treat it like that not keep repeating it like a mantra. And there is no great sign of a productivity surge either.

unit labour costs were likely to have grown faster than in the previous quarter


In these minutes was an unintended critique of the MPC’s policy of slashing interest-rates to 0.5% and spending £315 billion on Quantitative Easing.

downside news on the near-term path of GDP likely to be published by the ONS and by the upside news on the near-term path for inflation.

You see output keeps disappointing and inflation keeps being higher than they expect. This is the real story of the QE era where we do not get the promised increases in output but we do get inflation at a rate higher than it should be considering how weak our recovery from the credit crunch has been.

In my opinion the Bank of England has expanded monetary too much and has failed to press hard enough for economic reform in the UK. Its orbit now covers the Financial Planning Committee for the banking sector and this covers the sector which could most improve our economic activity in the short,medium and long-terms. Yet what did we get from the UK establishment? A Vickers report whose weak reforms were kicked as far as 2019.

In essence we have been taught again the limits of monetary policy and will one day have to face the costs of an “exit strategy” from these failing measures.

There was one change in this months minutes and it was that Adam Posen did not vote for further monetary easing. Perhaps he was mulling this interview he gave to the Guardian back in March 2011.

If I have made the wrong call, not only will I switch my vote; I would not pursue a second term.

This is predicated around inflation falling to 1.5% this summer. Perhaps he has “laid awake at night thinking about it”. Although he may have had a chat with MPC colleague Paul Tucker.

I think inflation might remain above 3% throughout the second quarter of this year, and possibly into the second half of the year

One hundred year Gilts

I gave some views to Russia Today on what I thought on this matter and here is the report. Those who read my post on this subject will not be surprised.


This entry was posted in Banking Reform, General Economics, Inflation, Quantitative Easing and Extraordinary Monetary Measures, Stagflation, UK Inflation Prospects and Issues. Bookmark the permalink.
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  • Anonymous

    Hi Shaun

    You have friends in court at the Treasury Select Committee. I have suggested before that you get in touch with them.

    On the output gap they say

    “The OBR relies heavily on the output gap in
    order to assess whether the Government is on  course to meet its
    fiscal mandate. However, as an unobservable measure, the output
    gap is prone to great uncertainty and frequent revision. There
    is therefore a risk that there will be unwarranted changes in
    fiscal policy as a result of reliance on it. We recommend that
    the Treasury ask the OBR to evaluate other, supplementary, approaches.”
    …they could have said the same for inflation forecasting couldnt they

    On QE they say

    ” While the Government maintains the current
    tight fiscal profile, monetary policy will remain the main tool
    for stimulating demand in the economy. The Bank of England appears
    confident of the efficacy of continued quantitative easing, and
    the Governor urged patience. We note from the OBR forecasts that
    despite its current extremely accommodative stance, monetary policy
    alone will be unable to close the output gap over the forecast
    horizon, with long term consequences for the recovery. Bearing
    in mind the risks of unwinding, we will continue to monitor the
    impact of loose monetary policy and the effectiveness of quantitative
    easing in our hearings with the Monetary Policy Committee and
    the Financial Policy Committee. We will also continue to explore
    the effectiveness of loose monetary policy on the economic recovery.”…………..

  • Arch Sceptic

    Hi Shaun,

      A fascinating article. You’ve touched on the topic of high oil prices before but I’d be interested to have some idea of what proportion of the inflation we’ve seen can be attributes to a) Oil prices b) Other commodity prices c) Falling sterling.

     It’s very hard to see where a sustained recovery is going to come from with falling consumer spending power combined with an increased propensity to save, rising taxes   , high unemployment and constrained government expenditure.

     Did you see the bondvigilantes piece about the effect of the government simply cancelling the gilts held by the BOE ? Any views.

  • The_forbin_project

    hello Shaun,

    What can you say ? the Real Price Index and the Creative Price Index keep on mis-behaving  even though both methods are “gerry mandered” to death    . 
    What can the B of E do ?  Resign? I should be so lucky !

     Well the other Media pundits seem to be reluctant to talk about the BoE failures,  so no job at the BBC ( or is that Minitrue? )  for you as you don’t tow the Party line !

    the cost of borrow the Bank of England is talking about is  and never was IMHO about mortgage rates to the common man but about rates for the Banks and their chums. ( the inner party ) .

    One can hope for a revolution but the British Public are happy with “Panem et Circensus”   ,   now who’s on X factor this  weekend……

  • Anonymous

    Hi Shaun
    An adulatory piece on Adam Posen in the London Evening Standard promoting him for Deputy Governor. Who is Russell Lynch, the promoter.

  • Anonymous

    The Evening Standard is owned by Alexander Lebedev, a former and possibly current member of the KGB.

    Why might the KGB want Adam Posen promoted ?

  • JW

    Hi Shaun
    ‘In essence we have been taught again the limits of monetary policy and
    will one day have to face the costs of an “exit strategy” from these
    failing measures.’
    I think its the cost of never being able to exit that will have to be faced.
    Appearance on Keiser Report next?

  • Anonymous

    Hi Shire
    I had seen that thanks and have replied although in spite of me using the name Notayesmanseconomics on there it comes up as anonymous!
    As I point out in my reply Russell Lynch is a big fan of QE..

  • Pavlo

    The BoE trying to talk down sterling again? On the other hand if we import more than we produce and sterling is weak then it follows inflation will remain stubbornly high! Simples?

  • MickC

    Surely the panem is becoming rather contaminated with sawdust. This is bound to take the populace away from the circensus sooner or later.

    Tesco feeling the strain whilst Aldi etc. do ok is a sure sign of consumer stress. Punishment for our current rulers in the local elections is almost certain-even though the alternative is also bloody clueless.

  • Eurozone crisis live: Christine Lagarde sees ‘light recovery, with dark clouds on horizon’ | Zwerbed

    [...] will be “below but close” to the Bank’s 2% target over the forecast horizon (don’t they always?…) and mounted a brisk defence of the QE programme to [...]

  • MickC

    So, we actually have “plungeflation” rather than stagflation.

    Until the banking system is sorted out (i.e. full disclosure of toxic “assets” which are really liabilities) the system cannot serve its true purpose of providing finance to trade and industry. We will just limp on with declining living standards-in the desert on a horse with no name?

  • Eurozone crisis live: Christine Lagarde sees ‘light recovery, with dark clouds on horizon’

    [...] will be “below but close” to the Bank’s 2% target over the forecast horizon (don’t they always?…) and mounted a brisk defence of the QE programme to [...]

  • Anonymous

    Hi Shire

    I had contacted them as you suggested and here is a copy of the reply.

    Dear Mr Richards
    Thank you for writing to the Treasury Committee. The Committee regularly takes evidence from Members of the MPC. The points you raise are useful background material to this work and I will make Members aware of them. The Committee previously reviewed the work of the MPC in its Report MPC: Ten years on which may be of interest to you.
    Yours sincerely
    Phil Jones
    Committee Assistant
    Treasury Committee

  • Anonymous

    Hi Arch Sceptic

    You final paragraph refers to something that regularly seems to get an airing in the QE era. Those that propound it seem to have forgotten the premise that things which are too good to be true usually are!

    Let us take it to its limit. Why should the Bank of England not buy all our Gilts and then cancel them. With one bound would we be free? Why have we not thought of this before?

    The problems are as follows.

    1. The increase in the money supply would be permanent. Whilst the transmission mechanism of money is weak as it is now then we may only get the sort of inflation we have had recently. However should we recover and grow then it could escalate. Our record of controlling escalating inflation is poor.

    2. The exchange rate would also come under pressure and would reinforce the inflationary effects.

    3. It would bring the Treasury and Bank of England together and make them one institution. Some (not me) still believe that the B of E is independent and this would ram it home to them that it is not. If you go too far down that road not only do you reinforce both 1 and 2 but you may loose the credibility of money. Fiat money relies on trust and that trust can be broken.

    So supporters of thsi move are to my mind thinking of our circumstances now only. At this time the bad effects would be masked by the fact that other countries are indulging in forms of easing/debasement and so it would be in the recovery where we would be hit worst of all. There would be much more than irony in something which was supposed to create a recovery stopping it!

  • Anonymous

    Hi Forbin

    I suspect it is for the best that I did not have an ambition to work for the BBC! I am afraid that dressing up assertions as facts simply is not me. In fact let me reword that I am proud that dressing up assertions as facts is not me.

  • Anonymous

    Hi JW

    One day we will find a way out although that day certainly looks in the distance right now. As to being interviewed by Max it would be interesting. Whilst he can be wild and wacky I admit a certain sympathy and liking for the principles behind the Silver Liberation Army…

  • Anonymous

    Hi Pavlo

    The Bank of England has got itself into a mess of its own making. Ironically £ at this time seems to be in a stronger phase as I mentioned earlier this week. We have pushed above US$1.60 and Euro 1.22 and Yen 131…

  • Anonymous

    If I recall the song correctly wasnt it by the group America? In spite of the media frenzy telling us about the US recovery whilst they seem to have done better than us there is a long way to go for them too.

    Each delay in dealing with the banking system seems to make everything worse and I remain of the view that until we do we will get no sustained recovery.

  • Dark Clouds on the Horizon for Eurozone Crisis! | Zwerbed

    [...] will be “below but close” to the Bank’s 2% target over the forecast horizon (don’t they always?…) and mounted a brisk defence of the QE programme to [...]

  • – Eurozone crisis live: Christine Lagarde sees ‘light recovery, with dark clouds on horizon’

    [...] will be “below but close” to the Bank’s 2% target over the forecast horizon (don’t they always?…) and mounted a brisk defence of the QE programme to [...]

  • Eurozone crisis live: Christine Lagarde sees ‘light recovery, with dark clouds on horizon’ |

    [...] will be “below but close” to the Bank’s 2% target over the forecast horizon (don’t they always?…) and mounted a brisk defence of the QE programme to [...]

  • Loafalot

    Given that ‘The establishment’ has now been failing to dig us out of this mess for 4 years & counting, surely we are close to the point that the public will be demanding change. Indeed, I think the Treasury Select Committee has recently started asking questions about QE (about time!). Now that you are a media celeb I think perhaps we should start a Downing St petition to get you onto the MPC. Along with Steve Keen, I think … assuming he would be interested.

  • Loafalot

    What’s truly amazing to me is that America et al were saying exactly that to Japan 20 years ago! And now when it’s our turn to take the medicine all of a sudden it doesn’t apply. The only conclusion as far as I’m concerned is that Bill Black is correct  -  the whole thing was a massive criminal sting perpetrated by US bankers, who still have the US political system bought and paid for via ‘campaign contributions’. So we are all banking zombies now…

    As for the US ‘recovery’  -  as Karl Denninger never tires of pointing out they have had no growth *ex-debt* since 1980! The whole mirage is based on massive accumulation of debt, which Obama has merely accelerated to give the impression of recovery. Clearly, as just another socialist he subscribes to Brownomics (ugh!).

  • Loafalot

    I think you have to be much firmer in rebuttal than that. This suggestion is Weimaresque and would likely crucify savers and those who have lived responsibly throughout this era of madness. Why does the world ignore moral hazard? I would like to see moral hazard respected and avoided at all costs. This suggestion would crush confidence in our currency ala Zimbabwe. Once begun the inevitable result would be pandemonium and continued printing (who would buy our debt after such an act?) … which is the death-knell. Frankly, anyone suggesting this deserves ridicule.

  • Anonymous

    Hi Lofalot

    When it was tested our political and monetary establishment  proved that it learnt little or nothing from the Japanese “lost decade”. Lesson one was do not let zombie banks continue and lesson two was that QE does not work.

    So it is no great surprise to me that any economic recovery is weak and in danger of fading…