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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Sadiq Khan is probably London's new mayor - what will happen in a Tooting by-election?

There will be a by-election in the new mayor's south London seat.

At the time of writing, Sadiq Khan appears to have a fairly comfortable lead over Zac Goldsmith in the London mayoral election. Which means (at least) two (quite) interesting things are likely to happen: 1) Sadiq Khan is going to be mayor, and 2) there is going to be a by-election in Tooting.

Unlike the two parliamentary by-elections in Ogmore and Sheffield that Labour won at a canter last night, the south London seat of Tooting is a genuine marginal. The Conservatives have had designs on the seat since at least 2010, when the infamous ‘Tatler Tory’, Mark Clarke, was the party’s candidate. Last May, Khan narrowly increased his majority over the Tories, winning by almost 3,000 votes with a majority of 5.3 per cent. With high house prices pushing London professionals further out towards the suburbs, the seat is gentrifying, making Conservatives more positive about the prospect of taking the seat off Labour. No government has won a by-election from an opposition party since the Conservative Angela Rumbold won Mitcham and Morden from a Labour-SDP defector in June 1982. In a nice parallel, that seat borders Tooting.

Of course, the notion of a Tooting by-election will not come as a shock to local Conservatives, however much hope they invested in a Goldsmith mayoral victory. Unusually, the party’s candidate from the general election, Dan Watkins, an entrepreneur who has lived in the area for 15 years, has continued to campaign in the seat since his defeat, styling himself as the party’s “parliamentary spokesman for Tooting”. It would be a big surprise if Watkins is not re-anointed as the candidate for the by-election.

What of the Labour side? For some months, those on the party’s centre-left have worried with varying degrees of sincerity that Ken Livingstone may see the by-election as a route back into Parliament. Having spent the past two weeks muttering conspiratorially about the relationship between early 20th-Century German Jews and Adolf Hitler before having his Labour membership suspended, that possibility no longer exists.

Other names talked about include: Rex Osborn, leader of the Labour group on Wandsworth Council; Simon Hogg, who is Osborn’s deputy; Rosena Allin-Khan, an emergency medicine doctor who also deputises for Osborn; Will Martindale, who was Labour’s defeated candidate in Battersea last year; and Jayne Lim, who was shortlisted earlier in the year for the Sheffield Brightside selection and used to practise as a doctor at St George’s hospital in Tooting.

One thing that any new Labour MP would have to contend with is the boundary review reporting in 2018, which will reduce the number of London constituencies by 5. This means that a new Tooting MP could quickly find themselves pitched in a selection fight for a new constituency with their neighbours Siobhan McDonagh, who currently holds Mitcham and Morden, and/or Chuka Umunna, who is the MP for Streatham. 

According to the Sunday Times, Labour is planning to hold the by-election as quickly as possible, perhaps even before the EU referendum on June 23rd.

It's also worth noting that, as my colleague Anoosh Chakelian reported in March, George Galloway plans to stand as well.

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