Charlie Bean, deputy governor of the Bank of England, has been seen as one of the swing voters on the Monetary Policy Committee. If he is one of the people who would have to vote for a rate rise, he does not seem like he is itching to pull the trigger any time soon.
In the speech he has just delivered in Northern Ireland, he thinks the signs of limited supply capacity and poor productivity is nothing more worrying than “puzzling”, he notes that there are persistent output losses after banking crises, is not too concerned about inflation or inflation expectations, but sounds most upset about the weakness in demand at the moment.
Worries about demand weakness with puzzlement about supply is not what constitutes a rate hiker. That rate rise might be on hold a bit longer.
Everyone knows that the head of the International Monetary Fund has ususally been a French man.
But this chart from Ousmène Mandeng, former IMF staffer and now at Ashmore Investment Management, brings the point home. Since Christine Lagarde, the French finance minister, is currently the bookies’ favourite, that blue line might just get longer.
Today’s FOMC minutes suggest that the detailed record of meetings will still be interesting even after the Fed chairman has given a press conference and the best bit – the economic forecasts – have been released.
The minutes of the April meeting are notable for a detailed discussion of exit strategy. Much of this is familiar: it reaffirms the rough ordering of: (1) Stop reinvestments; (2) Change forward guidance; (3) Drain reserves; (4) Raise short-term rates; (5) Sell assets.
In the past week, the Bank of England’s new forecasts marked the moment it judged the damage from the recession was permanent. This showed up in quite an amazing chart.
I noted that Britain’s fiscal authorities had not yet given a forecast with a similar profile and “continue to predict growth of roughly 3 per cent a year as far as their eyes can see (and further)”.
The smart people at the OBR were quick to point out that I was wrong. As this chart shows, the fiscal watchdogs are more pessimistic about the level of output than the Bank. This is not because the Bank has higher forecasts for growth (its are lower), but because the Bank assumes the past official data will be revised higher while the OBR does not. Note how the gap between the OBR and Bank lines are widest apart now.
With both the Bank and the OBR having a similar profile for future UK economic output, the big question is what level of output can the UK economy produce without generating inflation. What is the supply capacity of the UK economy that accompanies these forecasts?
Will the European Central Bank change when Mario Draghi becomes its president in November? In comments today, Lorenzo Bini Smaghi, ECB executive board member, suggested there would be no revolution. “The agenda won’t be much different from that of the last few months,” he told a conference in Milan.
Certainly, Mr Draghi has so far shown no signs of wanting to rock the boat. Wisely, the Italian central bank governor kept a low profile during the drawn-out race to take over from Jean-Claude Trichet, whose non-renewable eight-year mandate expires on October 31. We have not, for instance, had public comments from him on a possible Greek debt restructuring.
Don Kohn, former vice chairman of the Federal Reserve, has just apologised for his errors in the financial crisis in front of the UK Treasury Select Committee, the equivalent of a Congressional committee.
He said he had “learnt quite a few lessons – unfortunately” from the financial crisis, including that people in markets can get excessively relaxed about risk, that risks are not distributed evenly throughout the financial system, that incentives matter even more than he thought and transparency is more important than he thought. Similar to Alan Greenspan’s mea culpa of 2008:
“I made a mistake in presuming that the self interest of organisations, specifically banks and others, was such that they were best capable of protecting their own shareholders”.
Mr Kohn told MPs
Ben Broadbent will be confirmed as an MPC member, I am sure, after an assured performance played with a very straight bat in front of the Treasury Committee. A little like when Martin Weale appeared before the Committee, MPs got rather irritated with Mr Broadbent’s refusal to say how he would have voted at the May meeting. This is a structural difficulty of these hearings.
Asking how you would have voted is a perfectly reasonable question; avoiding giving a straight answer is also understandable so as to avoid prejudicing your time on the MPC.
The solution has to be more, rather than less, openness from the candidates, since they can always change their minds and explain changes. MPC members have to do that in any case, so evading such questions does appear shifty and does not make any material difference to an MPC stint.
The main things we learnt about Mr Broadbents views were the following:
1) He is bound to be less hawkish than Andrew Sentance, whom he replaces. He refused to say the MPC was in the wrong place at the moment, unlike Mr Sentance. That does not mean Mr Broadbent would vote for no change, but he is not as hawkish as Mr Sentance.
Ben Broadbent, the new member of the Bank of England’s Monetary Policy Committee, is just about to start his confirmation hearing in Parliament (more later). But he will have to deal with today’s inflation figures for April, which have pushed CPI inflation up to 4.5 per cent from 4 per cent in March as shown in the picture.
But though Mr Broadbent did not know the following, he had little need to worry. The April CPI is heavily distorted by the timing of Easter and its effects on air fare prices. Some 0.36 percentage points of the 0.5 percentage point rise in inflation has come from air fares.
The European Central Bank’s fears about inflation appear to be materialising. Eurozone “core,” or underlying, inflation has reached the highest level in more than two years, according to Eurostat, the European Union’s statistical office. Excluding volatile energy and unprocessed foods, consumer prices rose at an annual rate of 1.8 per cent in April – up from 1.5 per cent in March and the highest since January 2009. The surge suggests higher headline inflation rates caused by commodity prices are feeding through into broader price pressures.
The late timing of Easter might have distorted the figures by delaying usual price-cutting offers. The ECB is also not a big fan of “core” measures, which it sees lagging indicators of underlying trends. Jürgen Stark, executive board member, once described them as “well suited for central bankers who don’t eat or drive”.
Late in the day, the Bank of England has just slipped out a press release revealing that one member of the new Financial Policy Committee has decided not to take the job.
Richard Lambert, former head of the CBI employers’ organisation and editor of the Financial Times, says the post would cramp his stlye:
“Since leaving the CBI I have spent a period away from work and on reflection I have decided, with great regret, that I do not wish to take up my position as an external member of the Bank of England’s interim Financial Policy Committee. I wish to devote my time to a wider range of aspects of public policy. And membership of the committee could place constraints on my ability to do so. Mervyn King, the Governor ofthe Bank, has been very understanding about my change of plans. I wish the committee every success inthe important work which lies ahead of it.”
I have just spoken to Mr Lambert