UK News

from MacroScope:

There be feudin’ at the BoE

The once-good relationship between Bank of England Governor Mervyn King and his most likely successor, Deputy Governor Paul Tucker, is coming  under increasing strain, according to a new book by former Daily Telegraph journalist Dan Conaghan.  It  alleges   King’s management style and and alleged disdain for the financial markets is to blame.

While the Bank of England’s Monetary Policy Committee remains reasonably collegiate, on other matters King more than lives up to the description from former chancellor Alistair Darling that he is ‘incredibly stubborn’, says Conaghan, who now worksas an asset manager.

“The governor can be particularly dogmatic,” he told Reuters. “One of the key things … is the attitude to the capital markets. One of my sources described Sir

Mervyn’s attitude as one of disdain. I’ve heard that repeatedly. Paul is much more pragmatic.”

One tangible upshot of this came at the launch of the Bank’s quantitative easing programme in March 2009, which Conaghan said led to an upsurge in failed trades on the British government bond market, until the central bank found a mechanism to lend back some of the gilts it had bought.

More broadly, Conaghan’s book The Bank: Inside the Bank of England describes something approaching a feud growing out of a philosophical split between King – who champions a purist, economics-driven approach – and Tucker, who is closer to financial market participants.

“It is widely acknowledged within the Bank’s upper echelons and elsewhere that the relationship between King and Paul Tucker … has deteriorated over the past few years. One very senior figure at the Bank describes it as being, at times, ‘a battle-ground,’ where the battles over policy, direction and structure are common. Another senior official at the Treasury concedes that they ‘do not get on, to put it mildly’.”

from MacroScope:

Broadbent’s BoE appointment keeps hawks in health

Ben Broadbent’s appointment to the Monetary Policy Committee ought to dispel any notions that the Bank of England would be left short of hawks after the departure of Andrew Sentance.

A brief look at the history of Reuters polls shows that Goldman Sachs' UK economists – led by Broadbent – were uber-hawkish in their outlook for British interest rates early last year.

In January 2010, Goldman predicted rates would rise to 1.5 percent by end of the second quarter of last year, and 2.5 percent going into 2011 -- hugely out of step with both the consensus and as it turned out, reality. Rates went nowhere last year, and are still at a record low of 0.5 percent.

Towards the end of 2011, Broadbent’s team moderated their forecasts significantly, coming in line with the consensus for an interest rate hike coming deep into this year.

But his latest set of forecasts resumed a hawkish tone, with an expectation for three 25 basis point rate hikes this year, and a further four in 2012. The consensus view from a Reuters poll on March 3, by comparison, was more restrained: a quarter-point hike to 0.75 percent by the end of the third quarter, before finishing this year at 1.0 percent.

With thanks to Sumanta Dey and Sarmista Sen from the Bangalore Polling Unit

from MacroScope:

The perils of predicting BoE policy

As we’ve noted extensively, economists often get it wrong. Leaving aside their collective failure to recognise an impending global recession, you might recall a shock interest rate hike from the Bank of England in January 2007.

This was another event that almost every economist polled by Reuters failed to spot, and there are signs that four years on, economists might be setting themselves up for a similar shock.

The consensus from the last Reuters BoE poll last week showed interest rates would stay on hold into the fourth quarter, even though UK money markets have priced in a 100 percent chance of a rate hike by May. Since the January meeting, some of the bank’s Monetary Policy Committee members have publicly stated their determination to fight strong inflation.

But going back to January 2007, the only analyst out of the 50 polled by Reuters who predicted that shock rate hike was Simon Ward, chief economist at Henderson Global Investors. If the MPC does indeed flay analysts’ consensus this year by hiking rates before April, he stands to repeat his 2007 feat by being the only economist in the last poll to forecast a hike in the first quarter.

“I have been a bit mystified as to why other people haven’t shifted (their views) as inflation figures have really shot up over the last few months,” Ward told Reuters.

He suspects a somewhat dovish speech last month from BoE Governor Mervyn King wrong-footed economists, based on the presumption that King wouldn’t have sounded so dovish unless he was confident that rates would stay on hold for a long time.

“I think that interpretation was incorrect, and King has been outvoted in the past. It’s not like the U.S., where there’s a certain amount of pressure to follow the chairman’s lead,” said Ward.

from MacroScope:

How uncertain exactly is the uncertain BoE?

For a central bank that looks certain to bust its 2 percent inflation target for most of the time between now and the London 2012 Olympics, there is still a lot of uncertainty out there.

Bank of England Governor Mervyn King referred to "uncertain" or "uncertainty" about the outlook five times at the May quarterly Inflation Report press conference according to the bank's transcript, and the latest one didn't seem much more confident in tone.

"There is great uncertainty about the outlook for both the United States and our most important trading partner, the euro area," King said in his opening remarks before taking questions from reporters.

Later on, he proclaimed that the recovery period "will take several years before we adjust back to anything we can call remotely normal."

But just how uncertain is the BoE?

George Buckley, chief UK economist at Deutsche Bank, has come up with a revealing graph measuring the width of the BoE's "fan charts", which identify the distribution of probable outcomes in their quarterly GDP forecast, against the market's main volatility measure, the VIX. They appear to track each other rather closely.

The spread on the fan chart between the weakest probable path for GDP growth and the strongest blew out to 7.5 percentage points  in early 2009 from just over 2.5 percentage points before the financial crisis set in three years ago.

from The Great Debate UK:

Bank of England Inflation report offers markets a reality check

-Mark Bolsom is Head of the UK Trading Desk at Travelex Global Business Payments. The opinions expressed are his own.-

Sterling tumbled to a one week low against the dollar in trading this morning, after the Bank of England delivered its latest quarterly inflation and growth forecasts today.

In his speech, Bank of England Governor Mervyn King downgraded his economic growth forecasts and raised inflation expectations, saying he expected inflation would fall well below its 2 per cent target in two years, even if interest rates stay low.

While markets had expected growth forecasts to be lowered, the Quarterly Inflation Report has been a bit of a reality check. The preliminary reading of Quarter 2’s GDP figure had put the markets in a good mood, as it looked like the economy was back on track.

But King was unequivocal in his belief today that the bias of policy was leaning towards additional quantitative easing, rather than monetary tightening.

This confirms the view that the economy is not out of the woods yet, and we’re not in a position to withdraw stimulus or even tighten monetary policy.

King was also very defensive about the Bank’s record of inflation, but they have overshot their inflation target for 42 out of the past 51 months. January’s VAT rise is definitely not going to help either – and they have been forced to increase their inflation forecast.

BoE’s King “doesn’t do sex appeal”

Bank of England Governor Mervyn King was on good form when he addressed the Royal Society – Britain’s oldest scientific discussion club – on the vexing issue of communicating complex forecasts to the great unwashed.

Aside from his usual moan about the media’s desire to reduce the BoE’s beautiful but baffling ‘fan charts’ of inflation forecasts to one or two numbers, he made a rare and welcome admission that in past years the central bank had not done as well as it could have to flag up the risk that a financial crisis was about to happen.

The BoE’s financial stability reports – like those from many other central banks – sometimes sounded as if they were crying wolf in the years running up to the credit crunch by warning of pretty much every risk to markets short of Martian invasion.

So King’s suggestion that in future the BoE might give a percentage probability for whether the world is about to go to hell in a hand basket would certainly make it clearer to see when the central bank really thinks the storm clouds are gathering.

(Though of course when their 20% forecast comes true, they’ll be asked why they didn’t give shorter odds, and when it doesn’t they’ll be accused of scaremongering.)

Sadly the message that less is sometimes more doesn’t seem to be getting through when it comes to the BoE’s quarterly forecasts of growth and inflation.

As well as fan charts, King said we might be able to look forward to ‘probability ribbons’ and 3D graphs (colour-coded for probability density) that most resemble a map of ski runs for an Alpine resort.

Too big to fail? Guerrilla central banking and the last resort

Deciding it was safe to come clean because banks are now on a more even keel and the worst of the credit crisis is behind us, the Bank of England has told the nation that at the height of the turmoil it secretly lent Royal Bank of Scotland and HBOS a colossal £62 billion, which is more than the entire British defence budget.

Both banks faced the imminent closure of high street cash machines and the curtailment of normal banking operations across the country.

The Bank said “this was a dire emergency” and Downing Street called the secret lending of taxpayers’ money in the Autumn of 2008 “a powerful reminder of how close the banking system came to near collapse.”

In Westminster, some MPs were flabbergasted, even though the loans have now been repaid.

“It is astonishing that this was kept secret for over a year,” said Vince Cable, finance spokesman for the Liberal Democrats. “The government has treated taxpayers like children while expecting them to foot the bill.”

John McFall, Treasury Committe chairman, said the sum caused “a little bit of an intake of breath thinking how many universities, how many colleges, how many jobs you could support with this.”

“It’s Enought to Make Anyone Feel Queasy,” was Ian King’s headline in The Times. “Any More £62 bn Loans You Haven’t mentioned, Merv?” asked the Daily Mirror, addressing itself to Bank of England Governor Mervyn King.

The Bank of England enters the political arena

Gordon Brown has not said openly that he plans to turn on the taps again in the budget with another package of spending and tax cuts, but his appeals to world leaders to do just that have led to a widespread feeling that more stimulus is to come.

So Mervyn King’s warning against more spending when debt levels are already so high has predictably been leapt upon by the Conservatives as a powerful message of support for their own position. 

Do you believe the way to beat the recession is to stimulate the economy with more spending, as Brown wants, or with  a more cautious, steady-as-she-goes approach as favoured by the Conservatives?

And should the Bank of England governor be straying so far into political territory?

Mervyn King’s warning to the government

The unusual foray into politics by Bank of England Governor Mervyn King, in suggesting there should be no more tax cuts or spending rises in next month’s budget, has been widely interpreted by the newspapers as a blow to Gordon Brown but a source of secret satisfaction to the Treasury.

Chancellor Alistair Darling, several say, was not happy with Brown’s reported budget plans to offer voters more jam before they had digested the 25 billion-pound fiscal package in last Autumn’s Pre-Budget report.

King’s message was interpreted as bad news for Brown just as the Prime Minister embarks on a whrlwind tour of the Americas to drum up support for agreement at next week’s G20 meeting on a major international programme of fiscal stimulus.

Most papers support the Governor.

“Mr King was right and timely in his message,” said the Times. “Fiscal profligacy by the government since well before the last election has sharply constrained the ability of UK policy makers to borrow and spend more.”

In a comment piece, the paper’s business editor David Wighton notes: “Mr King’s intervention hardly strengthens the Prime Minister’s hand as he tries to rally support for further measures at the G20 meeting.”

Damian Reece in the right-wing Daily Telegraph commented: “King was right to warn the government over further public spending splurges. Given the long-term damage Labour has helped cause to the economy and sterling, we really can’t take much more punishment.

No time to be boring for BoE’s King

Bank of England Governor Mervyn King has made his first public speech since the emergency bank recapitalisation programme and several newspapers commented on the change in demeanour of a man who once said his ambition as a central banker was to be boring.

The dramatic events over the past two months since the collapse of Lehman brothers have forced King into the spotlight — like it or not. Being boring is not an option now.

Speaking to businessmen in Leeds, King said the economy is probably entering its first recession in 16 years and that the outlook has not worsened as rapidly as it has in the past month for a very long time.

He called the financial crisis an “extraordinary, almost unimaginable, sequence of events” and added: “We now face a long, slow haul to restore lending to the real economy, and hence growth of our economy to more normal conditions.”

The Daily Telegraph was impressed by the language. “Mervyn King certainly wasn’t pulling his punches in Leeds last night,” it said, adding that the chances of a “quickie” recession are slim.

The Guardian said markets may well interpret his speech as further support for the idea that interest rates could go below 4 percent.

“Why? Well one way to encourage money to flow around the system is to make its price cheaper,” the paper noted. “King, the man accused of being overly concerned about ‘moral hazard’ , suddenly sounds like an arch-pragmatist.”