The Saturday Economist 15th December : Monetary Policy and the Crank at the Bank?

The Saturday Economist 15th December

Economics news – The Crank at the Bank, monetary regime, unemployment and construction updates. Plus a trip on the ONS magic roundabout.

Monetary Policy
Does the flap of a butterfly’s wings in Brazil set off a tornado in Texas? Not sure! but it is evident that comments by Mark Carney in Canada can create a flap in Westminster and London.

In a speech to the Toronto CFA Society, the next Governor of the Bank of England suggested a possible change in the monetary policy framework. Inflation targeting much loved by Mervyn King with a twenty year pedigree, could be abandoned in favor of a nominal GDP target. “Adopting a nominal GDP level target, may be worthy of consideration” Carney said.

So what would this mean? Assuming average long run average growth of 2.4% and an inflation target of 2%, the nominal GDP target would be around 4.5% – 5%. Implicitly the Bank would become compliant in accepting a growth mandate as well as an inflation target.

What should be do? GIven the challenges of hitting the inflation target and the inherent problems in generating growth, it doesn’t sound like a great step forward. The bank should stick with monetary policy and inflation, let the government grapple with growth. For once I agree with the Governor.

Let’s face it, the bank has still to understand the forces of the “new inflation”. Spencer Dale’s speech in London this week entitled “Sticky Inflation” is a manifestation of “Sticky Thinking” in the Governor King regime. The Bank should disaggregate goods and service sector inflation and reassess the depreciation model as a first step.

The Crank at the Bank?
But is the Mervyn King the most disastrous Governor ever in the history of the Bank of England? This is the claim of Tim Congdon, an old friend and arch monetarist writing in Sharepoint this week. The article entitled “Crank at the Bank” suggests King’s attitude towards the financial sector remains as hostile and bigoted as that of most university dons.

“He has learned a lot in the last 20 years, but his understanding of the Banking Sector remains incomplete and unsatisfactory, and he has been the most disastrous Governor in the Bank’s history.” Strong stuff but Tim has a point.

There was a time when it was enough for the Governor of the Bank of England to “raise an eyebrow” at a discrete dinner to modify behaviour in the banking sector. Now it appears, the  corrective procedure includes a policy committee, a quarterly report and market sensitive sound bites about capital deficiencies and forced asset disposals to effect change.

Clearly this is not right. The lender of last resort should have a close relationship with the top bankers, especially when formulating advice which is market sensitive and can influence investor behaviour and attitude. Most disastrous ever is a tough call but the Governor would make the short list.

In other economics news, the unemployment figures were pretty neutral, The claimant count fell by just 3,000 in November, from an increase of 6,000 in October. Earnings were around 1.8%, still in negative territory adjusted for CPI inflation, suggesting household spend will remain under pressure. For the quarter there will be little change in the claimant count consistent with zero growth in real GDP output in Q4.

Don’t get too excited by the 8% jump in construction output in October, total work was still down by 5% compared to October last year. Do not get too depressed either, for the quarter output will be down by 4% year on year. The good news, the construction “recovery” will begin in the first quarter, growth will be 5% – 10% up on last year. It’s just a work out of the 2011 bounce. No triple dip in Q4 or in 2013.

The Office for National Statistics
No triple dip but not much growth either. Is this a forecast? Yes but we caution as always we are not forecasting the output of the UK economy but rather the output of the ONS.

The ONS web site took a hammering this week. The official website for communicating public data in the UK is “terrible” and a “disaster”, MPs told Andrew Dilnot, the man responsible for the service.  Will Moy of told the committee that navigating official statistics websites could be like venturing onto a “magic roundabout”.

I know what he means. Thus you begin to understand the travails of a Saturday Economist.

Inflation Watch
 Oil price Brent Crude closed at $108 per barrel compared to an average $109 in November and December last year. No real inflation pressure in the short term from energy prices.

Markets Update – 
Markets rallied further this week. The FTSE closed up 5921 up 54 points, the Dow closed up 13135 from 13026 and in Europe the Dax closed at 7596 from 7405. UK ten year gilt yields closed at 1.89 from 1.75 and US rates closed at 1.70 from 1.62.

In currencies, the dollar closed up against the Euro at 1.32, Sterling closed up against the Euro at 1.25. The Sterling Dollar rate closed up against the dollar at 1.62.

That’s all for this week, don’t miss The Sunday Times and Croissants out tomorrow. 
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