This morning has seen a clarion call from the Bank of England using its house journal the Financial Times. Its economics editor Chris Giles has reported this.

The Bank of England will this week step up its warnings that households, businesses and investors are underestimating how soon interest rates will rise.

Okay let us park for the moment the feeling of “deja vu all over again” and look for the explanation.


A strong body of opinion in the central bank, including the governor, believes that the economy is more vulnerable to inflation, so even a small improvement in its forecast for growth would require higher borrowing costs to stave off rising prices.

The last set of Monetary Policy Committee Minutes are mentioned and let me give a longer quote from them than used by the Financial Times.

some tightening of monetary policy would be required to achieve a sustainable return of inflation to the target. Specifically, if the economy were to follow a path broadly consistent with the August central projection, then monetary policy could need to be tightened by a somewhat greater extent over the forecast period than the path implied by the yield curve underlying the August projections.

This was all really rather mealy-mouthed and was so unconvincing that the 5 year Gilt yield which opened that day at 0.62% ( if we look back at the behaviour of the Pound £ back then some seemed to actually believe the Bank of England might act that day) fell sharply on the day. Other events have intervened ( North Korea) but it is now 0.45% which does not have much scope for Bank Rate rises to say the least.

We are also directed by the Financial Times to this in the August Quarterly Inflation Report.


Mark Carney, governor, backed this message up in the inflation report press conference saying that the BoE’s assumption at the time of “more than one interest rate hike over the course of three years . . . would be insufficient” to control inflation. Ben Broadbent, his deputy, added: “The important point is that one should not think that the economy, at the moment, can grow at the sort of rates we used to enjoy, certainly before the crisis before running into inflationary pressure”.

As you can see from the Gilt yield changes I pointed out above these two gentlemen could have saved themselves the embarrassment of everybody yawning and ignoring them.

Why might this be?

One problem is the Bank of England’s poor forecasting record combined with its problems with economics highlighted by this from my update on February 3rd.

Specifically, the MPC now judges that the rate of unemployment the economy can achieve while being consistent with sustainable rates of wage growth to be around 4½%, down from around 5% previously.

Remember when Governor Carney suggested that an unemployment rate of 7% was significant? We can argue now about how much significance but by signalling it one might reasonably expect action especially as it was not long before we were given more forward guidance about the unemployment rate.

an estimate of its medium-term equilibrium rate of 6%–6½%.

Of course it is now 4.4% and the output gap theories of the Bank of England have collapsed like Mordor’s Tower of Doom. Although the Ivory Tower thinkers that proliferate in Threadneedle Street continue to believe it is just around the corner.

Also there seems to be a problem with mathematics at the Bank of England as this from the FT highlights.


Bank officials say these views have not changed and the argument for rate rises to tame price rises will have strengthened since the last meeting following sterling’s 2 per cent drop, which will further increase the cost of imports and edge inflation higher in the months ahead.

Okay so a 2% drop is important but apparently this from February 3rd was not.

the 18% fall in sterling since its November 2015 peak,

Of course they actually cut interest-rates and added to QE by £70 billion when the UK Pound £ was very weak. This hyping a 2% move rips over its own feet. There is also the problem that the most important exchange rate for inflation purposes is against the US Dollar as so many commodities are priced in it and it is as I type this where it was before the last meeting.

Forward Guidance

The next problem is that Forward Guidance has been a catalogue of misguidance in this area. There was this from Chief Economist Andy Haldane on the 20th of June this year.

I considered the case for a rate rise at the MPC’s June meeting

This provoked a shock as it would have been a road to Damascus turn around for the architect of the “Sledgehammer” monetary easing of August 2016. Yet he has yet to vote for this and whilst he pointed towards later in the year what has happened to change his mind? Nothing really. The problem with dithering and delay is the lags in monetary policy as raising interest-rates now because you expect higher inflation in November is none to bright.

If we look back there was this from Governor Mark Carney back on the 12th of June 2014 in his Mansion House speech.

There’s already great speculation about the exact timing of the first rate hike and this decision is becoming more balanced.

It could happen sooner than markets currently expect.

We are still waiting Mark! Indeed “sooner than” has gone into my financial lexicon for these times alongside “temporary”. As he thought the economy back then was doing this it would be odd to act now rather than then.

with the economy expanding at an annualised rate of 4% and jobs growing at a record pace.

Oh and tucked away in that Mansion House speech was a critique of the policy easing of August 2016.

The economy is still over-levered. The housing market is showing the potential to overheat.

Quantitative Easing

If you wish to start tightening policy then as I suggested several years ago in City-AM it would be best to stop this.

As set out in the MPC’s statement of 3 August 2017, the MPC has agreed to make £10.1bn of gilt purchases, financed by central bank reserves, to reinvest the cash flows associated with the maturities on 25 August and 7 September 2017 of gilts owned by the Asset Purchase Facility (APF).

Some £1.125 billion will be reinvested today in some short-dated UK Gilts.


Mark Carney faces quite a list of problems right now. His policy of Forward Guidance has in fact been misguidance and in spite of the supposed reforms its efforts at economic forecasting remain woeful. It is hard not to have a wry smile at this from the Guardian.

The Bank of England enforced a 1% rise on striking staff yet its fantasy forecasts claim a 3% rise for the UK as a whole is just around the corner. Really? How?

Actually if the hints of a change in the public-sector pay cap are true then we may see a modest rise in wages but that does nothing for the years of over optimism based you guessed it on the “output gap”. The deeper question is dodged that via underemployment and self-employment the situation is weaker than the official figures suggest and imply.

Perhaps we will be told the truth in a decade like these words on the BBC today from former Bank of England Governor Mervyn King.

My advice was very clear – we should not reveal publicly the fact we were going to lend to Northern Rock.

Although an ex-colleague of mine still does not seem keen.

The FSA’s former head, Sir Hector Sants, said it would be “inappropriate” for him to comment.

A Break

I plan to take at least a couple of days off as I will be attending Chelsea & Westminster Hospital tomorrow for some keyhole surgery on my knee. It has been a long story as I first ruptured my ACL well over 20 years ago but earlier this year I had another injury and decided this time that (hopefully) improvements in surgery and technology outweighed the risks of a reconstruction. Fingers crossed.