The Bank seeks to slow the economy some more

As I have reported before, the Bank of England has been tightening money conditions for sometime because it wishes to slow the UK economy. It has recently increased the base rate to 0.5%. It used macro prudential policy to seek to rein in consumer credit. It has been particularly successful at reducing car loans and it refers to this in the latest Inflation Report. The government has also been active in cutting car demand with its high VED taxes on dearer vehicles introduced last spring and its attack on diesels. Mortgages are a bit dearer and higher Stamp duties and BTL taxes have also hit the housing market.

This month the Bank ends the Term Funding Scheme for the commercial banks, a scheme designed to ease credit conditions a bit. Now in this Report we hear that the Bank wants to get back to the inflation target faster, and expects to have to raise rates again to do so. Meanwhile there has also been an additional monetary tightening through the increase in the exchange rate in recent months. So why is the Bank doing this when most people want to see a bit more growth?

The Bank has gone back to its idea that the UK economy can only grow at a fixed pace, and if it starts to grow faster than the trend increase in capacity it will cause more rapid inflation. The Governor himself has questioned this theory in a good lecture he gave pointing out that if you are capacity constrained then you can simply import more, keeping prices down. You can also invite in more workers from abroad, keeping wages down as has been happening on a large scale in recent years. It is difficult to know why the Bank thinks the UK trend growth can now only manage 1.5%, and why they ignore the sensible thoughts of the Governor on the impact of the global economy on prices and wages. They also need to ask how flexible the economy is to scale up capacity. We see new capacity going in and there is plenty of corporate cashflow to invest. Many companies are expanding capacity considerably by continuing to recruit extra staff.

It is also curious that they seem to have an asymmetric and distorted view of sterling and its role in inflation. Apparently a recent devaluation is causing most of the price rises we are seeing, but the more recent strengthening of sterling will not redress this sufficiently. They tell us sterling is 15-20% down on the levels of November 2015. That was of course a peak level. Sterling on the trade weighted is currently around the levels it was at for a long period from 2009 to 2014. Against the dollar is almost back to the pre referendum vote level. If you want to see a big devaluation which did not reverse you need to go back to 2008-9 when sterling was badly damaged by the banking crisis. That devaluation did not generate as much inflation as some expected.

The Bank claims that Brexit uncertainty is a big factor in the UK economic performance. There is precious little evidence to support that. The Bank, after all, has had again to scale up its growth forecast for the UK, which paradoxically gives it a better excuse to tighten money more. Consumption remains the main driver of the UK economy. I don’t meet lots of people telling me they have cut back on their shopping because of Brexit. If, as the Bank now thinks, wages are going to pick up a bit that should be good news for consumption and therefore for economic activity.


  1. Mark B
    February 9, 2018

    Good morning.

    I recently watched a film about the Great Train Robbery. They stole £3 million which, in today’s money, would now be worth over £50 million. My thought upon reading that was;

    “And that is what inflation and devaluation has done to our currency !”

    It is only right that the UK economy returns to normalisation now that the banking crisis is over. There has been too much cheap money. Plus, we must remember that as the pound falls against the EURO many Europeans see the UK as no longer a good place to make money, so they will be heading home or elsewhere. This may have an impact on the labour supply in many key industries which will drive up wage inflation.

    I would prefer that the BoE increase interest rates at a low level but continuously. eg %0.1 per month for at least 6 months rather, %0.25 or %0.5 on an adhoc basis. Markets, industry and people will know what to expect and can plan accordingly. This will have the same overall impact but less dramatic.

    I too disagree about all the nonsense on BREXIT. There are simply too many unknowns. But building up a bit of a buffer for any slowdowns is no bad plan. Sooner plan for the worst than the other way round.

    1. Hope
      February 9, 2018

      JR, what did you expect? All the govt bodies are continuing with project fear to change our minds during the vassal state extension to get us to change our minds. Economics always used to scare or glean votes.

      Why have you not questioned Davis why he feels he U.K., and is now willing to pay, the EU £100 billion to talk about trade? The £40 billion is after deducting our assets in the EU, Davis response to Priti Patel in parliament.

      Hammond still in post? He either acted contrary to collective responsibility and govt policy and should be sacked or his dept was out of control so he should be sacked. Davis claimed several times, select committee and parliament, there was no impact assessments. The govt cannot have it both ways. One of them has to go. I accept Davis claimed he would resign if Green went, I am still waiting for him to honour his pledge. It would not be a loss if both went.

      1. Hope
        February 9, 2018

        Ben Beoadbent deputy governor on Radio four today disagrees with the view and thinks the BoE has correctly called everything. I suspect he is ambitious because it would not have escaped him that Carney was overt political during the referendum and he had no right to be so. I also suspect he is standing up for his boss who again yesterday blamed the lack of growth on the uncertainty of Brexit and thinks May should provide the assessments.

        Now if we had a leader as PM his feet would not touch the dust as he departed from his post and his number two would be disappointed as he would follow him through the same door.

  2. duncan
    February 9, 2018

    I am perplexed as to why the author takes aim at the central bank’s anti-Brexit agenda then feels the need to shower Carney with undeserved praise

    The BoE and its governor are to all intents and purposes one and the same. Yes, there’s a board with its members expressing their differing views and voting accordingly but it’s all very much coordinated

    What is becoming startlingly obvious is the bank’s politicisation. It achieved so called independence from government in 1997 but the idea that it remains untarnished by political interference is pure tosh, trash and nonsense

    Carney is a fervent Europhile. He’s also a political player whose actions and decisions impose income and asset changes in the real world. He knows he can influence peoples perceptions and he does, regularly

    Carney’s agenda is to prevent Brexit. His responsibility, as Governor of the BoE, should be the responsible management of monetary conditions of the UK economy. He would have failed in his duties if it wasn’t for the inherent and innate productivity and flexibility of the UK private sector that keeps the UK economy propped up

    Carney’s not too be trusted.


    The 4 (unhelpful to Brexit? ed)

    1. Sir Joe Soap
      February 9, 2018

      Having loosened conditions in late 2016 (to prevent a recession which would never have happened) they now are planning to tighten over the next 6 months (to try to create a slow-down or recession which needn’t happen).

      1. Ian wragg
        February 9, 2018

        This is continuation project fear. Having been spectacularly wrong after the referendum they now try and engineer a recession to blame on Brexit.
        The Eurozone is already slowing down which implies trouble for Italy and southern Europe so they can blame Brexit for that.

      2. Hope
        February 9, 2018

        All Carney’s predictions have been wrong to date. But his actions are about trying to make some of his predictions come true! Treasury politicized, HMRC politicized, civil servants politicized, phase one capitulation and underhand behaviour caught by the DUP. Come on, when is May going to own up she is responsible or take action. I think the lack of action perfectly demonstrates this is in accord with her wishes. She is dull but not that stupid.

        Are you going to argue the cabinet overloaded by remainers or the Brexit committee overloaded with remai ersis a coincidence or mistake! Hammond allowed to speak against govt policy to remain, Johnson speaks in line with govt policy and rebuked!

    2. Bob
      February 9, 2018

      You nailed it there Duncan, Carney is a politician not an economist.

      He’s famous for his forward misguidance, so why does the BBC hang on his every word instead of calling him out for this subversive maneuvering?
      Answer: Because the BBC are singing from the same hymn sheet as George Soros, Richard Branson and Lloyd Blankfein, not to mention yacht-mates Lord Mandelson and George Osborne with their penchant for rubbing shoulders with the oligarchy.

      When does Carney’s employment contract expire?

    3. zorro
      February 9, 2018

      Make it five – Robbins


    4. Rien Huizer
      February 9, 2018

      Mr Redwood, your post has too many issues for me to comments in a concise manner. However, criticizing macro prudential policy as “tightening” suggests something different from what is actually taking place. That poplicy deals with the capacity of the system to handle system-wide shocks and is only indirectly related to
      (cyclical )monetary policy . Another point: interest rates a re still very low and with increases on the horizon in both US and EU there is room to get back to more normal levels (I reckon we should be upwards from 4% and that is a long way off. Especially comsumer spending and non-productive investment (housing for other purposes than own use)y debt affects systemic risk. Add to that that the UK government still has a bank to sell (RBS) it is perfectly plausible that the banks is making these choices in both monetary and prudential policy. As you know the Governor is in favour of a high level of policy consistency and that is what you get. Besides, using monetary policy in a pro-cyclical manner (to boost an economy that is already operating at full capacity) is rarely good policy. You ferer to an abundance of labour and product that could be imported but there is a balance of payments to consider (especially if/when brexit makes the UK more independent and thus far more vulnerable) as to product and.. what about the dreaded immigration objectives?

    5. Dennis Zoff
      February 9, 2018


      “if you are capacity constrained then you can simply import more, keeping prices down. You can also invite in more workers from abroad, keeping wages down as has been happening on a large scale in recent years.”

      Yes, I also noticed the interesting slight of hand ambiguity. In particular, since it is at odds with past comments from John that previously reflected a different point of view….usually a more negative opinion with regards to Mark Carney and the importing of more people and low wage scenarios?….the effects on housing, NHS, GP’s time, education complexity/school placements, working tax credit, benefits, etc, do appear to be ignored on this occasion?

      Is it a case of going positively for the man on this occasion, for expediency? Puzzling, to say the least?

      Reply Not a policy I propose! It has been the policy and is I thought one the Bank liked

      1. Dennis Zoff
        February 9, 2018

        Now I understand. Thank you John.

  3. Lifelogic
    February 9, 2018

    We can indeed grow far more quickly if only May’s government did the right things for a change. Mainly get out of the way. Regulatory restrictions and inflexibility with bank lending (plus rip off fees, inflexibility, slowness and high margins) have deterred me from investing in a few new property developments and other business expansions over the past few years.

    If you fire the very many people (mainly but not exclusively in the state sector) who produce so little of value (often worse than little) and release them to get a productive job you will get a huge boost to the economy. If you deregulate and go for easy hire and fire yet another huge boost. Cheap, on demand, energy and killing the parasitic litigation culture, getting a health system that worked, a decent education system, scrapping gender pay reporting, cut and simplify taxes, scrap the work place pension, the minimum wage …. all of these would boost the economy. As would some real and unfettered competition in banking.

    High taxes of themselves kill productivity. Given the tax system you often find it is not worth working if you have to pay for childcare unless you are paid a very large salary as two lot of PAYE Tax are involved. Or not worth working overtime as you only end up with 10% to 40% of the pay.

    Similarly it is often better to do DIY or fix your own car than working paying Tax then paying professionals with VAT and yet more PAYE. The government ( and the bonkers litigation culture they have created) are the problem. Plus of course their absurd expensive energy agenda.

    1. Leslie Singleton
      February 9, 2018

      Lifelogic–We have lost the way–Now one reads that choosing to do an internship without pay is to be “illegal” and that HMRC have been told to force companies using them to pay minimum wage–As if there weren’t a few other things for the Government and HMRC to spend their time on–The so-called Conservative Party these days beggars belief

      1. Lifelogic
        February 9, 2018

        Meanwhile the police in one area appeal for unpaid volunteers drivers!

        If you want to work for nothing or for any sum at all it is yours choice the government should keep out of it, it does huge damage.

  4. LenD
    February 9, 2018

    Yeah..Carney..after listening to him yesterday i was very impressrd..Carney really knows his’s a pity we havn’t got him on our brexit negotiating team with DD

  5. Lifelogic
    February 9, 2018

    Farage, on LBC yesterday, said May deserved one last chance to show some backbone on brexit. He is very generous man indeed. I will be amazed if she does. She is, alas, not just hopeless on Brexit she has totally the wrong policies on energy, the economy, overseas aid, quality only immigration, the size of the state sector, taxation levels, taxation simplicity, employment laws, over regulation of almost everything, gender pay reporting, her appalling choice of chancellor, HS2, Hinkley C, rented housing, the gig economy, law and order ….. what exactly does she have right?

    She is also robotic and clearly an electoral liability.

    1. Bob
      February 9, 2018

      What a shame that that Times journo spun a story against Andrea Leadsom during the leadership contest. But I suppose if she had the right stuff she would have shrugged it off and pushed ahead.

    2. Hope
      February 9, 2018

      It is not her policies LL, it is implementing EU directives, regs into laws in this country. That is how the remainers disingenuously said there were only a few EU laws. Parliament changes them into law. What should have been pointed out is that Parliament transforms regs and directives into law without debate or votes but want to make a big hoo ha about Henry Viii clause, total bol….s.

  6. Bob Dixon
    February 9, 2018

    P45 for Carney?

    1. Lifelogic
      February 9, 2018

      May, Hammond, Rudd and the head of the DPP too please.

  7. Lifelogic
    February 9, 2018

    Alison Saunders has a letter in the Telegraph today. It fails completely to address the real issue of gross (group think) incompetence (often far worse) in her DPP department and within the police.

    They have time to bring prosecutions but not resources to bother check the evidence properly first. Nor release it fully to the defence. This seemed to be her stance on Woman’s hour anyway.

    She should go and go now or be fired, the appalling “men are all guilty if accused” culture needs to be dealt with.

    1. Richard1
      February 9, 2018

      Indeed it is impossible to imagine a private sector manager surviving after catastrophes of miscarriage of justice such as this woman has presided over. She should certainly be fired. The government need to get a bit more Trumpian.

  8. Fedupsoutherner
    February 9, 2018

    I despair. When growth slows we’ll be told its the Brexit effect. Any slow down in the economy has been due to Carney and Hammond. Its another ploy to frighten people into thinking Brexit is a mistake.

    1. Sally
      February 9, 2018

      That was my immediate thought when I heard this reported on the radio.

    2. Lifelogic
      February 9, 2018

      Hammond 15% stamp duty, 20% VAT, 28% CGT, 12% IPT, NI both at nearly 25% and income tax at 45% plus workplace pensions tax, apprentice tax, green crap energy taxes ….. what more does one need to kill growth in an economy? Endless OTT regulation and the litigation lunacy on top of that too.

    3. stred
      February 9, 2018

      Fedup. My thoughts too. In Sussex prices of houses have dropped. A friend was given a high valuation last year and agreed to sell. Four months later he agreed a much lower figure and now the buyer has pulled out. There is nothing wrong with the property. Just when HMG has put energy prices up to pay for carbon tax and smart meters, the oil price has risen and stocks are down, the minimum wage law has put up costs, equality legislation is hammering supermarkets, environmental taxes have clobbered car sales and councils have been allowed to put up CT and, guess what, a taking the full whack- Carney decides that inflation will be brought down by putting up mortgages and housing costs, which are now included in inflation.

      He is either useless or hoping that the bad news will help Mr Soros’s campaign just in time for the MP’s vote and demands for a second referendum. Maybe both.

  9. jerry
    February 9, 2018

    John, you appear critical of the BoE policies, far enough, but surely they are only working towards targets, goal and guidelines set by the govt. of the day?

    1. Leslie Singleton
      February 9, 2018

      Dear Jerry–That rather begs the question whether what they are doing is the best way to achieve those targets, goals and guidelines or indeed whether they understand why we are where we are

      1. jerry
        February 9, 2018

        @Leslie Singleton; Then it is for HMG to either change/modify those targets, goals and guidelines or change the players within the BoE, always assuming that HMG “understand why we are where we are” – indeed HMG could bring responsibility for actioning such policy back in-house, as it was before 1997 and New Labour. Time to stop all the smoke and mirrors, the BoE was not, is not and never will be “independent” of govt.

        Politicos, in other words, need to stop hiding behind the BoE when in reality they are being critical of the govt. (and own party).

      2. Hope
        February 9, 2018

        Lady S. your point understandable, but that assumes the govt is doing what it tells us. I am sure you are not that naive.

        A bit like the cut immigration to tens of thousands when the Treasury has used and continues to use the expectation of mass immigration to create growth. May reiterated her lie of cutting to tens of thousands, does she forget she led the policy since 2010 where historic record of numbers came here? You appear to be astute and wise to me and I think you know the answer to your question.

  10. Brexit
    February 9, 2018

    Mr Redwood we’re sure that if you had become Chancellor after the Referendum, the awful Governor Carney would have been fired as one of your earliest tasks.

    Yesterday’s report & press conference was a shocker – a new low, if that’s possible. We hope you will continue to speak out against the BoE as strongly as you are able to.

    Best wishes, the Brexit Facts4EU Team

    1. KatC
      February 9, 2018

      I don’t know why you are all so terribly upset with Mr Carney, i thjnk he is most charming and knowledgable..i could listen to him for hours..i think he deserves another term in office…

  11. Prigger
    February 9, 2018

    “I don’t meet lots of people telling me they have cut back on their shopping because of Brexit”
    I find that too. Spending as noted even by Fake News from the Retail Sector has increased considerably. Yet I feel I heard the Governor say yesterday households had “cut their spending by half”. It may be I take him out of context… merely misheard..but that is what the overall thrust of what he was saying anyway.
    Unfortunately, financial-world thinking here and across the Atlantic sees rising wages as a problem. Yes I understand the ins and outs of uncontrolled inflation making wage growth or vice-versa. But it was barely a month ago our media was sobbing saying ” Wages have not risen for ,… “( fill in a period yourself of five, ten, hundred or 200 years ).

    I believe rising wages, generally, a good thing. Ask any worker. Ask nurses. Ask the Labour Party. Ask the Liberals. But we hear no condemnation from these career politicians after a typical largely repeat performance by Governor Carney. So he thinks interest rates will rise. I do believe he has said that….once…before. Those times he thought it a good thing. Now no. He does not seem to have a clue what he is talking about. But then how could he? He is not privy to most of what is going on in the economy at any level.
    Did he mention for instance the import of Chinese goods into America very recently and reciprocal and compensatory action by China? No he did not. He is not aware of the elephant in the room standing on his foot.

  12. Sir Joe Soap
    February 9, 2018

    This character Broadbent just on R4 denying that the MPC forecasts have been too pessimistic in the event of a Leave vote. He didn’t know what all the fuss was about.

    So why were conditions unnecessarily eased in late 2016 and are now being tightened more than was thought necessary in late 2017? It might have been best not to fiddle with the machine post Brexit referendum.

  13. formula57
    February 9, 2018

    The Bank does not inspire confidence in its judgements. If only it would resume its highly valuable forward guidance so we would know the opposite was going to happen.

  14. Sakara Gold
    February 9, 2018

    Whatever happened to the good old-fashioned British entrepreneurial spirit? If we had a few people like Elon Musk here in the UK – who can build a rocket company like SpaceX from scratch and launch his electric car to the asteroid belt – we would not have the gigantic double deficits and enormous national debt that we have.

  15. acorn
    February 9, 2018

    Central Banks were invented by politicians inorder that they could shift the blame for inflation away from themselves. Before the current US FED, that country went without a central bank for 75 years, the elected politician managed, currency issuing Federal Treasury did it all in that time.

    Now we have the situation where Trump’s fiscal policy of cutting taxes and increasing government spending will increase spending power into the economy. This the FED will see, with its tunnel vision, as a signal that inflation is going to rip. So the FED will increase interest rates to reduce spending economy wide. Thus negating Trump’s fiscal policy moves he got elected on.

  16. Bert Young
    February 9, 2018

    Carney was very “woolly” yesterday and found it difficult to put his responses to questions in a clear and straightforward manner . He did upgrade his economic forecast for this year to 1.8% – also for next year ; what he did emphasise was the uncertainty concerning Brexit . He – like Hammond , does not see the sense in being optimistic or putting trust in the resilience of the Brits , he must know that his time is short at the helm and does not want to attach his future to this country .

  17. Epikouros
    February 9, 2018

    With Carney at the BoE and Philip Hammond chancellor both of who are ardent remainers we could be forgiven in suspecting that they are attempting to crash the economy blame it on Brexit and so wreak the process. However there are economic problems that do need addressing brought about the modern fashion of following Keynesian economic theory; any economic problems throw money it and that it in large amounts and worry about the consequences later. Hoping a a non harmful solution will present itself. Wishful thinking as what is not dealt properly in the first place always ends up causing greater problems later on.

    What is suspicious about Hammond’s and Carney’s actions is the timing. Indeed something needed to be done as some asset values are spiralling out of control and debt private and public are at unacceptable levels Why now and not earlier or later? The former because we have known for a long time that assets were rising too fast. The latter because inflation is currently greater than 2% and growth is slowing. Should they not have waited until inflation was very low again and the economic growth higher to be able to weather the shocks to the system of higher interests rates and other actions much better. Is there and ulterior motive or are they just incompetent. Wreaking brexit would favor the former and being enamoured with Keynes would favour the latter. Keynes appears good in theory but in practice it is only throwing good money after bad.

  18. alan jutson
    February 9, 2018

    Perhaps if the BOE had got its forecasts right in the first place, we would have not needed all of these so called corrections to get us back to almost square one.

  19. Denis Cooper
    February 9, 2018

    “It is difficult to know why the Bank thinks the UK trend growth can now only manage 1.5%” – Yes, that was the topic of a comment I made back in November, here:

    which I don’t wish to repeat at length.

    I quite often cite this website:

    which says that the trend growth rate has been 2.45% a year since 1956, but this other reference:

    takes it back a bit further:

    “Background noise apart, UK GNP since 1949 has grown at about 2.5 per cent per annum, irrespective of the party in office, regardless of geopolitical events … ”

    I see no reason why the future trend growth rate should be so much lower.

  20. Denis Cooper
    February 9, 2018

    There’s a chart of the sterling trade weighted index here:

    It peaked around the autumn of 2015 and was already heading down long before the EU referendum, in fact sterling had turned against the dollar in the summer of 2014 before the Tories could even get a referendum Bill through Parliament.

    When looking for effects of the referendum it is always necessary to look back before the referendum and take into account any pre-existing trends.

    Incidentally the Times has finally admitted that there has been no significant flight of EU citizens from their posts in the NHS.

    “Fears that foreign doctors and nurses would desert the NHS as Brexit approaches have been eased by figures showing little change in the number of EU-born staff since 2016.”

    Fears that the Unpatriotic Times has always been keen to stoke up.

  21. Colin
    February 9, 2018

    “You can also invite in more workers from abroad, keeping wages down as has been happening on a large scale in recent years.”

    There, in a sentence, is the problem with modern Britain. Our rulers are positively working against the interests of the people, deliberately seeking to keep us poor. This needs to change.

    1. acorn
      February 9, 2018

      Then stop electing a laissez faire, neo-liberal, Conservative Party government. Get it to explain to you why, in the last three decades, the workers are getting a smaller share of gross national income (GNI – GNP) and a larger share is going to the big houses at the top end of town!

      1. Edward2
        February 10, 2018

        Colin has explained why.
        Millions of new people since 1997 have come here.
        Mainly earning average or below average wages.
        GDP is up a bit but but when divided by the higher numbers of people it is not.
        Established wealthy people still exist and have been added to by some very wealthy non doms.
        So the statistics look like you say.
        So the statistics look like

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