Right message, wrong time

It's precisely the wrong moment for central bankers to say they’re unimpressed.

This week saw the publication of the minutes of the Bank of England’s Monetary Policy Committee’s, (MPC), last meeting, on  3/4th July. They revealed that the decision to refrain from more Quantitative Easing, (QE), was unanimous. This makes it all the more likely that the publication of next month’s Bank of England quarterly Inflation Report will be accompanied by the introduction of so-called "forward guidance" on the future path of interest rates.

There are two variants of this seemingly arcane piece of central bank armament; "threshold dependent", the variety favoured by the Fed, where increases in rates are tied to metrics of economic performance, or the "time dependent" alternative tentatively embraced by the ECB, which promises to keep rates low, "for an extended period", say. My guess would be that the MPC will also go for the latter, as it is more likely to gain unanimous support on the committee.

Personally, for the UK, I find these policies at best a flawed concept, at worst quite probably counter-productive, and almost certainly bad for central bank credibility in the long run.

It’s the right message, at the wrong time.

Four years ago, say, (when Mark Carney blazed the trail by introducing such guidance in Canada), it would have been a great idea, as we had just narrowly avoided financial Armageddon and thought it was quite possible that the economy had entered a permanent winter. Right now, however, things are very different; the green shoots of recovery are well above ground, and it’s precisely the wrong moment for central bankers to damage psychologies by telling us they’re not terribly impressed by our efforts and think they’ll have to keep rates low for years. I’d further posit that the fear of rates going higher is, across the economy as a whole, not the major pre-occupation for individuals and businesses. Nobody is afraid that rates will return to the 15 per cent we saw in the early nineties in the UK; borrowing costs of 6 or 7 per cent do not seem life-threatening compared to the present 4 or 5 per cent.

No yield curve forever also drives the bankers’ dream of a return to 3-6-3 banking even further over the horizon, (borrow at 3 per cent, lend at 6 per cent, and on the golf course with the client by 6pm). Instead, why not borrow at 0.5 per cent and use the money to buy Gilts at 2.25 per cent, with zero credit risk-wonderful for bank balance sheets, but not much help for the economy?

Meanwhile, investors with spare cash don’t find 0.1 per cent deposit rates too exciting and are happy to plunge into emerging market corporate bonds at 4 per cent - which, ironically, is just the sort of mis-pricing of risk that is spooking central bankers.

Bank of England. Photograph: Getty Images

Chairman of  Saxo Capital Markets Board

An Honours Graduate from Oxford University, Nick Beecroft has over 30 years of international trading experience within the financial industry, including senior Global Markets roles at Standard Chartered Bank, Deutsche Bank and Citibank. Nick was a member of the Bank of England's Foreign Exchange Joint Standing Committee.

More of his work can be found here.

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Tom Watson rouses Labour's conference as he comes out fighting

The party's deputy leader exhilarated delegates with his paean to the Blair and Brown years. 

Tom Watson is down but not out. After Jeremy Corbyn's second landslide victory, and weeks of threats against his position, Labour's deputy leader could have played it safe. Instead, he came out fighting. 

With Corbyn seated directly behind him, he declared: "I don't know why we've been focusing on what was wrong with the Blair and Brown governments for the last six years. But trashing our record is not the way to enhance our brand. We won't win elections like that! And we need to win elections!" As Watson won a standing ovation from the hall and the platform, the Labour leader remained motionless. When a heckler interjected, Watson riposted: "Jeremy, I don't think she got the unity memo." Labour delegates, many of whom hail from the pre-Corbyn era, lapped it up.

Though he warned against another challenge to the leader ("we can't afford to keep doing this"), he offered a starkly different account of the party's past and its future. He reaffirmed Labour's commitment to Nato ("a socialist construct"), with Corbyn left isolated as the platform applauded. The only reference to the leader came when Watson recalled his recent PMQs victory over grammar schools. There were dissenting voices (Watson was heckled as he praised Sadiq Khan for winning an election: "Just like Jeremy Corbyn!"). But one would never have guessed that this was the party which had just re-elected Corbyn. 

There was much more to Watson's speech than this: a fine comic riff on "Saturday's result" (Ed Balls on Strictly), a spirited attack on Theresa May's "ducking and diving; humming and hahing" and a cerebral account of the automation revolution. But it was his paean to Labour history that roused the conference as no other speaker has. 

The party's deputy channelled the spirit of both Hugh Gaitskell ("fight, and fight, and fight again to save the party we love") and his mentor Gordon Brown (emulating his trademark rollcall of New Labour achivements). With his voice cracking, Watson recalled when "from the sunny uplands of increasing prosperity social democratic government started to feel normal to the people of Britain". For Labour, a party that has never been further from power in recent decades, that truly was another age. But for a brief moment, Watson's tubthumper allowed Corbyn's vanquished opponents to relive it. 

George Eaton is political editor of the New Statesman.