Bank Bites Back
When oil prices went up in 2008 the media blamed the Bank of England’s monetary policy. When VAT rose in 2010 and 2011, the media again blamed the Bank for being too inflationary. When the price of bonds rose in 2012, the media blamed the Bank (QE) for hurting virtuous savers with low interest rates. When the price of equities rose, the media blamed the Bank (again, QE) for making the rich richer – and hence everybody else poorer (yes, British progressives even brought “fairness” into monetary policy). When the price of London houses rose in 2014… well, guess who gets the flak?
So I enjoyed Carney and co sticking two fingers up at the Inflation Report today. At the press conference we again saw a long stream of questions about housing from the hawkish journalists who mostly live in, wait… where is it… let me guess… Aberystwyth? Carney and co did a great job of throwing them off, here is a choice quote from the Guv’nor:
Guy Faulconbridge, Reuters: Perhaps it’s a stupid question, I didn’t quite understand – do you see signs of a bubble in the housing market in London? And another stupid question probably, but you’ve been in your job nearly a year, what have you found most difficult about doing your job? Thank you very much.
Mark Carney: Answering stupid questions Guy, that’s the most difficult thing.
You probably didn’t understand on the first question because at no point in the Report or in the press conference did we talk about housing in a specific city, a specific borough in a city, because we make policy for the United Kingdom.
Quite right. Spencer Dale even debunked “Londonism“:
The other question is – is, independent of that, do increases in house prices have a material impact on economic activity? And in the past one can observe quite a strong correlation between increases in the house price and economic activity.
The question is, is it house prices themselves that are driving that or is it something else? And we published some work in that box which tried to get at that by looking at, as house prices move, do the consumption behaviour of say renters, people who rent houses, change very differently to those who own their house? And if it was house prices themselves, you’d expect to see very different movements.
In fact, in terms of the cross section of data, you don’t see very different movements. So we don’t think house price movements in themselves are a big driver of activity. And so when we’re thinking about the macroeconomic implications it’s the transactions, which is where we think is the main driver.
This is not a post about monetary policy and that’s something we should celebrate. The Riksbank have made household debt a focus of Swedish monetary policy and it is proving a terrible policy failure. The ECB is emulating the Bank of Japan. The MPC has declined the opportunity to screw up UK monetary policy and is rightly ignoring changes in London house prices. Bravo!