Well done the Bank

I was delighted to read that the Bank now thinks the UK economy will grow by 2% this, year and confirms it did grow by 2% last year after all.  I trust the Treasury will now raise their forecasts as well, as they were too pessimistic at the time of the Autumn Statement as pointed out at the time.

I look forward to the comments of various bloggers who wrote in over the past year to tell me I was wrong to argue the UK economy would grow at 2% both years. Do they now think the Bank is wrong, having backed its much lower forecasts so strenuously?

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31 Comments

  1. Jack
    Posted February 2, 2017 at 6:14 pm | Permalink

    And the lower interest rates and QE actually reduce demand, so the economy will grow 2% in spite of BoE measures, not because of them.

    Though, I personally support a permanently zero interest rate policy (ZIRP), as raising rates directly feeds into CPI inflation through the term-structure of costs they present to the economy. Likewise, higher rates mean more people are receiving entirely risk-free money, which can reduce real output if the economy is at maximum capacity. Lower interest rates keeps costs down, help keep shop shelves stacked, and keep unnecessary inflation at a minimum.

    Also, it’s worth noting that even 2% GDP growth is painfully slow. Let’s aim higher, at least 6% annual GDP growth should be the target, and can easily be achieved through expanding the fiscal deficit (payroll tax cuts are my preferred policy).

    • Tony Hart
      Posted February 4, 2017 at 8:22 am | Permalink

      Jack – please explain why ‘lower interest rates and QE actually reduce demand’. Surely, GDP has grown because of increased private borrowing (although I cannot see why HMG borrowing doesn’t increase GDP). Please also explain why increasing rates directly feeds into CPI inflation.

      Or are you being very sarcastic?

      • Jack
        Posted February 4, 2017 at 2:10 pm | Permalink

        No, I’m not being sarcastic. There is no evidence whatsoever that lower rates boost borrowing, look at total private sector loans throughout the whole 0.5% Bank rate + massive QE period, they have totally gone through the floor. Only recently have they picked up, mainly because of the income tax threshold rises which have acted as a small fiscal stimulus to the economy.

        Controlling total private sector borrowing is a matter for the regulators (i.e. capital requirements) – trying to influence it via manipulating interest rates not only doesn’t work, but is also actively harmful.

        As for why the BoE artificially setting rates above 0% directly adds to CPI inflation, I’ll quote Warren Mosler:

        The spot and forward price for a non-perishable commodity imply all storage costs, including interest expense. Therefore, with a permanent zero-rate policy, and assuming no other storage costs, the spot price of a commodity and its price for delivery any time in the future is the same. However, if rates were, say, 10%, the price of those commodities for delivery in the future would be 10% (annualized) higher. That is, a 10% rate implies a 10% continuous increase in prices, which is the textbook definition of inflation! It is the term structure of risk free rates itself that mirrors a term structure of prices which feeds into both the costs of production as well as the ability to pre-sell at higher prices, thereby establishing, by definition, inflation.

        The natural rate of interest is zero. If the BoE stopped intervening in the overnight interbank market, and stopped paying IoR, the “base interest rate” would fall to 0% and stay there forever. And that’s a good thing.

        • Jack
          Posted February 4, 2017 at 2:21 pm | Permalink

          To summarise, banks lend based on income. Interest rates are a tiny factor.

          Additionally, which I forget to add to the above, the propensity of savers to spend their interest income is greater than borrowers borrowing to spend. So lower rates directly reduce demand in that they reduce the private sector’s interest income, which overrides any positive effect on borrowers having less interest payments to make.

  2. Old Albion
    Posted February 2, 2017 at 6:26 pm | Permalink

    It must be the Brexit effect JR. 🙂

  3. John
    Posted February 2, 2017 at 6:42 pm | Permalink

    Just as you said and that Philip Hammond would get more revenues than he was planning to get.

    How many times have they made announcements that they and others would have to revise up their growth expectations. Must be a bit embarrassing for them. Glad they seem to be looking more to the real word now.

  4. Lifelogic
    Posted February 2, 2017 at 6:51 pm | Permalink

    2%, not too bad, and that is with a lefty PM and Chancellor in charge. Both pushing expensive religious energy, central wage controls, bonkers employment laws (to be build on), a dysfunctional NHS that kills thousands, a bloated & largely inept state sector, dysfunctional banking, more & more red tape, endless wasteful vanity projects and absurdly high taxes on the productive.

    Just think how much better it could be if the leadership actually had a working compass.

    • Lifelogic
      Posted February 2, 2017 at 7:09 pm | Permalink

      Fillon’s bid for French presidency in chaos I see. Rather a shame as he was the only one suggesting the right solutions, but surely he must go, even in France.

      Why do the BBC keep suggesting that Marine Le Pen & the Nation Front are from the “extreme right”? They are nothing of the sort. So can Le Pen beat the pro EU Macron? Worth a punt at about 3:1 perhaps.

      • Richard1
        Posted February 2, 2017 at 9:54 pm | Permalink

        This is bad news. M Fillion is the first really sensible candidate for President of France in recent years. It will be a great pity if he is obliged to stand down. Marine LePen is clearly a far leftist albeit anti-immigration and anti-EU. I wonder why Nigel Farage and his supporters make common cause with such a socialist who seems opposed for everything they (used to) stand for?

        • Bob
          Posted February 3, 2017 at 8:40 am | Permalink

          @Richard1
          What do you mean by “make common cause”?

          Are you referring to being in favour of self rule and properly controlled immigration?

        • rose
          Posted February 3, 2017 at 4:59 pm | Permalink

          She is always complaining that they wouldn’t make common cause with her. She wanted to form a bloc with them and they resolutely refused. Not that the MSM would get a detail like that right.

  5. fedupsoutherner
    Posted February 2, 2017 at 7:10 pm | Permalink

    Ha,ha,ha. We have the last laugh. Who really thinks these experts are experts???? They are all in it for their own benefit and sod all of us. I always thought you would be right John.

    • Lifelogic
      Posted February 3, 2017 at 6:30 am | Permalink

      Indeed they are not independent experts they are hired guns infected with the state sector group think that is fashionable at the time. You tend to get the expert opinion you want if you are prepared pay for it and select the right “expert”.

  6. Bob
    Posted February 2, 2017 at 7:10 pm | Permalink

    Mr Carnage is still talking Britain down.

    Telegraph headline

    “Bank of England upgrades 2017 growth forecast -but pound tumbles as Mark Carney cautions Brexit still has consequences”

    • Original Richard
      Posted February 2, 2017 at 9:58 pm | Permalink

      Mr. Carney is in a very difficult position.

      Acting in the best interests of the UK means he is in danger of ruining his reputation for economic prediction.

      • Lifelogic
        Posted February 3, 2017 at 9:51 am | Permalink

        What reputation for economic prediction? He has proved hopeless.

  7. David B
    Posted February 2, 2017 at 7:29 pm | Permalink

    The economy is growing more strongly than expected and inflation is starting to rise.

    It is time the 0.25% cut in interest rates was reversed and a gradual rise in rates started to bring them to a normal level.

    This is over due and we will regret it if it does not start soon.

    • Lifelogic
      Posted February 3, 2017 at 6:33 am | Permalink

      It should never have been cut. But real competition in banking needs to increase. Bark margins and fees are far too high and terms too restrictive.

    • LondonBob
      Posted February 3, 2017 at 11:25 am | Permalink

      Interest rates need to be normalised, the housing market needs further correction, bring back the Taylor rule.

      On housing John the new stamp duty rates have killed the market, can we instead apply the new rates to foreign investors only, I know this would mean the British government discriminating in favour of British people but this is what most countries do.

  8. Roy Grainger
    Posted February 2, 2017 at 8:34 pm | Permalink

    Never mind the bloggers, only the other day George Osborne was citing the old pessimistic forecast for 2017 in justification of his Project Fear campaign. Seems he’ll never learn.

  9. John
    Posted February 2, 2017 at 8:43 pm | Permalink

    Why is the Governer saying that inflation will rise to 2.8% when it is his job to keep it a 2%? If he is not up to the job when he has the tools to meet 2% (interest rates) then maybe we have the wrong man in the post.

  10. Iain Gill
    Posted February 2, 2017 at 9:10 pm | Permalink

    The economy maybe doing well. I don’t think all Brits are getting a fair crack at that success though. The areas around the old steelworks, mines, shipyards are often mostly still depressing areas with far too few jobs for the numbers of people the state owned “social housing” sector insists on keeping in areas with insufficient jobs. The people in the information tech business displaced by the constant entry of cheap foreign workers on one immigration wheeze or another. Really these things need looking at (and real action not just hot air) or Ms Mays speech outside number 10 when she first became PM will be looked back on as empty hot air.

  11. Ed Mahony
    Posted February 2, 2017 at 9:27 pm | Permalink

    So far you’re winning the argument on the economy!

    But i think Brexiteers need to be careful. They (we – we’re all Brexiteers now or should be) need to ensure that when we leave the EU, that we bring immigration, in general, down significantly. And at same time, make sure trade deals are tied up as quickly as possible so there isn’t any significant mid-term damage to our economy. If we get these right, then most people will be satisfied with Brexit. If not, then there could be real trouble especially from those – millions – who voted to leave because they saw immigrants taking their jobs and lowering their standard of living.

    I also think we need to be careful about Donald Trump. He makes many people in the UK, including many Brexiteers, extremely uncomfortable as US President. Too close an association with him, could damage Brexit.

    And i also think we need to be careful about not bashing or undermining the EU too much. Because if it collapses, then we’ll blamed – to an important degree – whether we think that is unfair or not – and we could therefore become a pariah in Europe for decades to come.

  12. Richard1
    Posted February 2, 2017 at 10:22 pm | Permalink

    It is good to see. Logically the Bank should now reverse its emergency interest rate and QE stimulus implemented last summer when it expected Brexit disaster as originally forecast. Let’s return to normal monetary conditions.

    Separately, I hope in private the Government are being rather more robust in their advice to the Trump administration than they are in public over Trump’s ridiculous protectionist posturing and unpleasant and counter productive travel bans. In other respects Trump is shaping up quite positively.

    In any event I see Mr Trump is to face the terrible & humiliating sanction of a boycott of his state visit by Tim Farron MP. That should bring him to heel.

  13. Posted February 3, 2017 at 12:33 am | Permalink

    If you actually study the accounting between HM Treasury and the BOE. Any taxes they we pay are actually destroyed in the overnight interbank market so that the BOE can meet its overnight interest rate.

    Since we left the gold standard this has been the case. So taxes don’t fund government spending they help to control inflation by destroying high powered money.

  14. stred
    Posted February 3, 2017 at 7:28 am | Permalink

    Given that around half of GDP growth is attributable to population increase, which is due to inward migration, it is not surprising that growth is strong. The UK issued over 800k NI cards according to the last national statistics office report and many will be for people who come to work in the UK but go home at least once a year, but are not included in migration numbers. GDP per head is correspondingly lower. The civil service must know this is true but it appears that the politicians who present the numbers may not.

    Certainly, very few voters realize what is going on. The numbers are still rising while the government strings out the process of taking back control and the city boys continue to make money from it. If numbers ever are reduced, growth will too. But growth per head will not and we will not need to build ‘garden villages’ over our countryside.

  15. alan jutson
    Posted February 3, 2017 at 7:50 am | Permalink

    Good to hear that the economy is still moving forward.

    Shame Carney cut interest rates further at the time as it had a drastic effect on depositors money.

    Guarantee if rates increase by 0.25% sometime soon, the depositors rate will only go up by that amount or less, and not back to where they were pre reduction.

    Thus Banks will have increased margins yet again.

  16. Denis Cooper
    Posted February 3, 2017 at 12:16 pm | Permalink

    A 2% increase in GDP is close to the EU Commission’s estimate of the one-off benefits of the EU Single Market for the EU as a whole; for the UK, more like 1%. While the quarterly rise of about 0.6% is close to the projected benefit of TTIP to the UK economy. In other words, the overall economic effects of both of these arrangements to enhance international trade are pretty marginal in the context of the natural growth of the UK economy.

  17. Piglet
    Posted February 3, 2017 at 12:41 pm | Permalink

    Everyone makes fun of the Bank of England and UK banks in general. My bank has just re-informed me that savings rates are being reduced, again.
    A very silly joke would be that if they sink any lower, then Savers will end up paying the bank for the privilege of taking their money. The joke is it is not a joke.
    Looks like a kids pot piggy bank provides a better service. Open 24/7 including Bank Holidays.

  18. am
    Posted February 3, 2017 at 4:21 pm | Permalink

    With growth now higher than originally projected I’d imagine gov borrowing will reduce. In addition uk exporters who have increased the pound export price are reporting larger profits as a result. This should reduce borrowing also. Still UK exporters, if just increasing the pound export price, have lost an opportunity to gain market share. Becoming a great trading nation includes volumes and taking advantage of currency falls. German export booms can be linked to euro falls.

  19. a-tracy
    Posted February 9, 2017 at 3:08 pm | Permalink

    “Project Fear was a dreadful mistake. Everybody should have known that it would take at least two years for the fall in direct fixed investment to be felt, ” says Giles Merritt from the Friends of Europe think tank in Brussels.”

    What is the direct fixed investment that is predicted to fall?

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