Super Thursday=Mansion House redux

That was the summing up of Moyeen Islam on Twitter, and I thought he captured the event neatly.

To explain what he meant:  The Governor’s Lincoln speech, in which he said that the decision about whether to raise rates would be ‘thrown into sharper relief’ at the beginning of next year, was, as he surely knew, going to be taken as a signal that, relative to before, markets should bring forward their estimate of when the first rate rise would come, and increase the probability of such a rise early in the year.  The totality of his remarks, the MPC minutes and votes, and the Inflation Report, by contrast, were taken, as the Governor and his fellow MPC members surely anticipated, as sending the opposite signal.

So, the Governor succeeded in talking up the yield curve at Lincoln, and then talking it back down again in the Inflation Report Press conference.  This echoes what happened at Mansion House in 2014.

The Governor was clearly irritated, yesterday, as in 2014, that his remarks appeared to have been misinterpreted.  [Witness his bad-tempered put down of the Guardian’s Heather Stewart, claiming she had not ‘read the speech’, unreasonable given that he will have known what he was going to do to the yield curve at Lincoln.]  One might have read him as saying:  you BoE watchers, you need to do your job better.

However, the lesson for me was that the MPC needs to do its job better, and simply release its best guess at what the trajectory of interest rates will be, given how it sees the economy developing.  Or rather its best guess at the distribution of future rates.

Ben Broadbent tried to head off such demands, which were encoded in the questions put at the Press Conference, by suggesting that it ‘would be foolish to pre-announce’ the future path of rates.  Carney himself adopted a similar tactic by saying that ‘the precise timing’ of the first rate rise could not be known in advance and would be ‘data-dependent’.  But these comments rebut a request that was not being made.  What was really being requested was that the MPC reveal the forecast trajectory for future rates in which the current vote was just one part.

To re-emphasise, I urge them not to compute something that isn’t already computed.  But to reveal what must already have been computed and, for reasons undeclared, is being withheld from the BoE’s audience.  This forecast distribution has to have been already computed because, when policy works with lags that are long and variable, and other shocks have effects over many periods too, a coherent monetary policy choice is a choice over a trajectory, and not a choice over a single rate.

Some readers might remember Mervyn King’s famous adage that they faced ‘one ball at a time’, which was to be understood as meaning the MPC does not worry about future rates.  But that could not have been true then and is not now.  The remarks of Broadbent and Carney veer towards encouraging the same view, that monetary policy can be done in a static fashion.  I can sympathise with wanting to take questions in this way, because the BoE don’t want to be put on the spot for simply concealing from us something they know.

But I hope people do put them on the spot, because it seems to me there is little merit in the deception.

The situation we find ourselves in, where the conversation happens with verbal hints, is like a mix between Groundhog Day and Tom Stoppard’s Dog’s Hamlet.

In the latter, characters talk in a barely decipherable code:  the language is not English, even though all the words are English.  Thus, we have continuous MPC communications in code, incorrectly parsed by the audience, with further communications about what was or was not said.  And the whole episode gets repeated over and over.

I played one of the characters in Dogs Hamlet, and had to commit to memory the line ‘cycle racks hardly butter fag ends’.  This being about 30 years later, I have no idea what the line was supposed to mean now.  Likewise, even a few days on, I’m not sure I know what ‘thrown into sharper relief’ means in this game.

[Thanks to Mark Butler for spotting a slip in the first edition of this post:  I misinterpreted Carney’s remarks about the state of the yield curve pre-Inflation Report].

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3 Responses to Super Thursday=Mansion House redux

  1. Mark Butler says:

    My interpretation of the comment that current market pricing would not lead to a sustainable recovery was that based on the projections you would get an overshoot in inflation 2/3 years out so in fact market pricing could be too benign… check out the minutes page 17:

    Hugo Duncan, Daily Mail: Governor, is the overshoot in inflation three years out that
    you spoke of a few minutes ago, is that a sign that interest
    rates will probably rise faster, or may have to rise faster than
    the market is currently expecting, as you detail in the
    Inflation Report?

    Mark Carney: Look, I think what it says is that in the Committee’s best
    collective judgement that the market curve does not deliver a
    sustainable return of inflation to target, because there is an
    overshoot; the economy moves into excess demand. Now
    there are a range of outcomes around that, that’s why we
    have inflation Fan Charts, but that’s the median of it, yes.

  2. marksastley says:

    Interesting, as usual. I noted yesterday that I thought that Carney was again trying to talk up the yield curve if you listened carefully enough (rather than asking same labour market question again) but market latched onto the vote and the lower near term inflation forecast, which are more ephemeral. Oh and I had a moan about the the drafting of the minutes reducing transparency about the state of play of voting.

    http://marktomarket.org/2015/08/06/was-boe-super-thursday-really-that-dovish-has-mpc-transparency-really-improved/

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