Bank of England joins the "forward guidance" party

The Bank of England's Monetary Policy Committee has announced that they will adopt "forward guidance" - a move which could prove psychologically self-defeating, or worse financially ruinous.

A few weeks ago I wrote in this blog that I felt the adoption of "forward guidance" by the Bank of England’s Monetary Policy Committee would be a mistake. Well, as expected, they did so, in an announcement timed to coincide with the publication of the Bank’s August Inflation Report -the quarterly document which lays out the Bank’s perception of the current state of the economy and forecasts for its performance over the next few years.

In that previous blog I highlighted the danger that forward guidance could inflict self-defeating psychological damage upon people and businesses by telling them, effectively, to ignore the good economic headlines that are increasingly appearing in the newspapers - i.e. the Bank of England doesn’t believe a word of it, and therefore won’t be raising interest rates for years to come.

The other side of the coin is potentially as dangerous. The form of guidance adopted was an assurance that the Bank wouldn’t raise rates until unemployment hit 7.0 per cent, (it is currently 7.8 per cent, and the Bank’s Report expects it to fall to 7.0 per cent only in mid-2016). In a vain attempt to preserve what’s left of the MPC’s credibility as an inflation fighter, caveats, or "knock-outs", were added to this promise. There were three of these: they wouldn’t wait that long to tighten policy if they thought a) inflation was going to be above 2.5 per cent in eighteen months to two years' time, b) inflation expectations became "unanchored", or c) "the stance of monetary policy pose[d] a significant threat to financial stability".

The nightmare scenario for the Bank, and for us all, is that policy has to be tightened because one of the "knock-outs" has been triggered before unemployment has fallen meaningfully. Imagine a world, 12 or 18 months hence, where either "knock-out" a) or b) is triggered, but unemployment is stuck stubbornly at 7.2 per cent. Given what's happening in the housing market, the prospects for acceleration thereof following this guidance, and the UK economy’s propensity to exhibit high inflation, I see a real danger that knock-out b) is the problem.

On the other hand, given the "productivity puzzle", (in this recession, productivity has dropped, and unemployment has risen less than one might normally expect), the stage seems set for productivity to rise, at the expense of employment, especially as employers become more confident and commit to long-delayed capital investment in new, more efficient plants and machinery.

If either inflation "knock-out" is triggered within the 12 to 18 months time horizon I mentioned above, that is a lot sooner than the date at which the Bank of England’s own forecasts expect unemployment to hit 7 per cent, i.e. mid-2016, (and Carney assures us 7 per cent is only a "way station" anyway, not a "trigger" for higher rates), and the danger here is that individuals and businesses are now fooled into taking on more and more debt, comforted by the Bank’s prediction that rates will stay where they are for almost another 3 years at a minimum, and the UK can already hardly be characterised as a country with low private debt. If rates do have to rise much sooner than this, then loan delinquency could sky rocket.

Outside the 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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Leave will leap on the immigration rise, but Brexit would not make much difference

Non-EU migration is still well above the immigration cap, which the government is still far from reaching. 

On announcing the quarterly migration figures today, the Office for National Statistics was clear: neither the change in immigration levels, nor in emigration levels, nor in the net figure is statistically significant. That will not stop them being mined for political significance.

The ONS reports a 20,000 rise in net long-term international migration to 333,000. This is fuelled by a reduction in emigration: immigration itself is actually down very slightly (by 2,000) on the year ending in 2014, but emigration has fallen further – by 22,000.

So here is the (limited) short-term significance of that. The Leave campaign has already decided to pivot to immigration for the final month of the referendum campaign. Arguments about the NHS, about sovereignty, and about the bloated bureaucracy in Brussels have all had some utility with different constituencies. But none has as much purchase, especially amongst persuadable Labour voters in the north, as immigration. So the Leave campaign will keep talking about immigration and borders for a month, and hope that a renewed refugee crisis will for enough people turn a latent fear into a present threat.

These statistics make adopting that theme a little bit easier. While it has long been accepted by everyone except David Cameron and Theresa May that the government’s desired net immigration cap of 100,000 per year is unattainable, watch out for Brexiters using these figures as proof that it is the EU that denies the government the ability to meet it.

But there are plenty of available avenues for the Remain campaign to push back against such arguments. Firstly, they will point out that this is a net figure. Sure, freedom of movement means the British government does not have a say over EU nationals arriving here, but it is not Jean-Claude Juncker’s fault if people who live in the UK decide they quite like it here.

Moreover, the only statistically significant change the ONS identify is a 42 per cent rise in migrants coming to the UK “looking for work” – hardly signalling the benefit tourism of caricature. And though that cohort did not come with jobs, the majority (58 per cent) of the 308,000 migrants who came to Britain to work in 2015 had a definite job to go to.

The Remain campaign may also point out that the 241,000 short-term migrants to the UK in the year ending June 2014 were far outstripped by the 420,000 Brits working abroad. Brexit, and any end to freedom of movement that it entailed, could jeopardise many of those jobs for Brits.

There is another story that the Remain campaign should make use of. Yes, the immigration cap is a joke. But it has not (just) been made into a joke by the EU. Net migration from non-EU countries is at 188,000, a very slight fall from the previous year but still higher than immigration from EU countries. That alone is far above the government’s immigration cap. If the government cannot bring down non-EU migration, then the Leave argument that a post-EU Britain would be a low-immigration panacea is hardly credible. Don’t expect that to stop them making it though. 

Henry Zeffman writes about politics and is the winner of the Anthony Howard Award 2015.