Home > Bank of England, Monetary Policy > The Creditable Dullness of Being Mark Carney

The Creditable Dullness of Being Mark Carney

UK macro is really quite boring at the moment, and I cannot be happier to report that news.  Of course boring events do not get reported as “news”, but that’s why we have blogs.  Sure, there is a lot of debate about Scotland and so on which is related to macroeconomics – but UK macro events are not really capturing the headlines.  UK GDP updates, labour market news… well, there’s a war on… let’s talk about Putin.

Contrast with the Eurozone.  Mario Draghi is exciting!  He is doing things.  Pulling levers!  Fiddling with interest rates.  Easing credit conditions, improving financial conditions.  Trying to get that CPI rate up… maybe.  Oh, and allowing inflation expectations to collapse.  That’s news.

Mark Carney expressed a worthy ambition in his statement to the Treasury Select Committee in 2013, that he “would like to achieve an exit in 2018 that is less newsworthy than my entrance”.  I think he is well on the way to achieving that.  This is how it should be.  Central banking should be boring – nominal stability should be boring.  If the nominal economy is stable, all the “news” will be “real”, in the sense of being supply-side.

For the first time in years I could not be bothered to watch the Inflation Report live last month, but skipping through the recording, the Broadbent, Carney and Shafik show is delightfully dull.  Carney even takes pleasure from his own boringness:

What we’re putting emphasis on, and I know it’s boring and repetitive and it doesn’t clip into a new headline, we’re focusing on the path, the likely path of rates, the limited and gradual adjustment in those rates over the medium term, because of the headwinds that are facing this economy.

And again…

First and foremost it’s about the path for rate increases. I know it’s dull, I know it’s repetitive, but that’s the problem with consistency, it’s dull and repetitive.

Bravo Dr. C, bravo.  And the annoying cricket metaphors are gone too.

This is what short-term inflation expectations (from gilt yields) looked like when UK macro events were newsworthy:

UK Inflation Expectations.  Source: Bank of England

UK RPI Inflation Expectations. Source: Bank of England

Quite the roller-coaster.  I use the 3.5 year measure because it’s the most complete time series.  Note this is RPI not CPI, and RPI at 3% is roughly equivalent to CPI at 2%.

Here is the last year and a bit:

UK Inflation Expectations.  Source: Bank of England

UK RPI Inflation Expectations. Source: Bank of England

What a dull, dull graph.  Carney and the rest of the MPC deserve the highest praise for making macro policy boring.

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  1. jamesxinxlondon
    September 15, 2014 at 17:40

    Welcome back from holiday ;-)

    A good success, indeed. Way too early to declare victory. We can only be happy if the BoE holds off raising rates, or raising expectations of raising rates, until average wage growth has been strongly positive for a year or two.

    I know some headline wage deals are a bit higher than 2% but another very important way of showing just how weak is average wage growth is to look at PAYE and NIS receipts. Tax revenues are still horribly weak, in contrast to the US where they appear to be rsing strongly. It is great to see the employment numbers in the UK but we do need real jobs paying real wages paying real taxes, too.

    Or is this too “fiscal” for the BoE to comment upon?

    • September 17, 2014 at 09:32

      I think I gave up hoping for “victory” a long time ago James :) Now I will settle for the Bank not screwing up again, and I am more confident in that.

      The OBR public finance commentary for August corroborated what we were talking about before: employment growth for people earning under the £10K threshold means lower
      receipts than would otherwise be expected (reducing the average tax rate). Who said tax cuts don’t create jobs? They also make the point that the lags for tax paid for the self-employed due to self-assessment will make the deficit look worse than it actually is.

      I had not thought about this before: it seems that self-assessment receipts are attributed to the public finances to the year when they are paid. i.e. if there is a big rise in self-employment in this fiscal year, and those people *will* pay a lot of tax, because of the self-assessment lag that will only affect the deficit next FY. A bit crazy!

  2. james in london
    September 17, 2014 at 13:30

    Fingers crossed on the self-employed. My experience is that they pay little tax. Will go look at the stats to see if they pay their “fair share”.

  3. james in london
    September 18, 2014 at 17:45

    The stats don’t exist for the tax paid by the self-employed in the UK, it’s all bundled together in the Self-Assesment bucket with higher rate payers and complex tax situations. Assessing “fair shares” looks really impossible.

    In the early noughties PAYE really did take off, and Self Assessment really did lag. Sadly, PAYE hasn’t even taken off yet. [table 2.8]
    https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/336662/Income_tax_receipts_statistics_July_2014_bulletin.pdf

    US tax situation maybe not as good as hoped, but the hype still there.
    http://www.rockinst.org/?utm_source=GraphicMail&utm_medium=email&utm_term=NewsletterLink&utm_campaign=King+Report+for+Wednesday%2C+July+10%2C+2103&utm_content=

  4. September 23, 2014 at 06:43

    No more annoying cricketing metaphors and no more endless references to ‘black clouds of uncertainty’.

    How are the NGDP growth figures looking BM?

    • September 23, 2014 at 09:22

      We do not have NGDP figures for Q2 until next week, along with the big GDP revisions.

      The BoE is expecting faster real GDP growth than the last OBR forecast over the next few years, but weaker productivity growth. I have not dug into that.

  5. james in london
    September 24, 2014 at 08:37

    NGDP rising at a rate of around 3%, judging by long run tax data. And on a very, very slight upward path. Calculated as the YoY % change in monthly government tax receipts (using a 24 month moving average to smooth out lumpiness from bonuses etc). Recent August tax receipts were not encouraging.

    Average wages tell an equally disappointing story as growth has gone negative, even if total wages were being boosted by the increasing workforce. Even that good story is now stalling judging by recent data to July.

    Only an insanely malicious MPC would allow the market to think that rate rises were as imminent as 1H 2015. The data is turning down, the MPC should react by pushing out expectations of rate rises, by tying them to nominal GDP/income expectations.

  6. September 24, 2014 at 08:54

    James and BM, and what does this mean for the starting assumptions for out turn NGDP 2014/2015 used by OBR for the coming Autumn Statement and therefore the likely assumptions for tax revenues and welfare costs over the next five years? Will they have to revise these from those given at budget time?

    • September 24, 2014 at 09:17

      I am a bit more optimistic than James about the short run NGDP forecast. NGDP must be growing at least by 4% y/y with RGDP growing at least 3% y/y.

      The dominant problem for the OBR (and everybody else) is that productivity growth keeps coming in below even pessimistic forecasts. In the March forecast they decided to ignore this problem, if I recall correctly, but, that cannot go on forever. It must be a big risk that they will downgrade the long run productivity forecast (currently above 2%). If they do that, long run NGDP growth will get a downgrade too, and hence tax receipts, and hence the strength of the public finances. Low productivity growth means “austerity forever”.

  7. September 24, 2014 at 09:40

    And is there not presently a tightening of monetary policy, passively and through expectations, and perhaps through the exchange rate?

    Is therefore the 3% figure above for implied inflation at 3.5 years, although stable, insufficient as an escape velocity?

    • September 24, 2014 at 11:30

      You inspired a new post!

      I am not sure about the passive tightening. The currency appreciation looks more like a positive external shock – steady inflation expectations says it is not a monetary tightening. We really need an NGDP futures market.

  8. james in london
    September 24, 2014 at 11:43

    One problem we have in the UK is that the ONS seems to calculate RGDP first and then inflate it to get NGDP. This “method” results in low quallity stats. Far better to calculate NGDP and then deflate it to get RGDP. At least the first number, NGDP, would be reliable. Produuctivity is even harder to measure.

    I think BM’s theoretical 1% CPI/GDP Deflator is potentially optimistic. It’s always very tricky number to calculate, especially when hovering around 0% (what is the error bar?). Tesco has had some accounting issues for sure, but the root of their troubles is deflation – much like (admittedly) not very good banks ALL being brought to their knees by the Central Bank 2008 liquidity crunch. The rise of Aldi and Lidl is not the root cause of the big supermarkets’ woes, deflation is.

    DaTM we are far from escape velocity and those two bears on the MPC, combined with too many other swing voters, means expectations for UK rates are correctly rising, but dangerously so for people who can see the true state of the economy. And who aren’t misled by unscientific need “to remove the punchbowl” – we are more likely to die of thirst than get a hangover – just like 2008.

  9. james in london
    September 24, 2014 at 11:50

    I ahve just recalculated the 24m moving average to include income taxes (PAYE and Self-Assessment) PLUS National Insurance, it is rising at just 2% YoY. It’s even worse.

    • September 24, 2014 at 12:04

      Nice comments as ever James, the point about the GDP-deflator diverging from the CPI is indeed important. I suppose that with productivity growth stuck at 0-1%, trend NGDP growth below 3% is feasible, and I just don’t want to think too hard about it.

      Receipts coming in below NGDP growth because of the self-employment shift plus a tax rate shift does seem like a reasonable “excuse”.

      • james in london
        September 24, 2014 at 14:40

        Excellent new blog, as ever.

        However, I worry about these “Part-Time Self Employed”. Some anecdotal evidence about them is enough to make you think of voting UKIP. Come over here, claim you are self-employed, get an NI number quickly via a this well known wheeze, do a little bit of work, start getting benefits, return home to points East and South East of Switzerland. And on a similar’ish scam, but for whom I have more sympathy, “sellers” of Big Issue. Are the PTES merely the other side of the coin of reducing numbers on traditional forms of welfare? Or am I being just too pessimistic? I hope not. Those tax numbers are poor. Fingers crossed they improve, but that is no basis on which to raise interest rate expectations.

  10. September 25, 2014 at 08:54

    James, with all that pessimism, next you will be talking about the black clouds of uncertainty!

    How about the Markit household financial survey from last week: “Income from employment rises at joint-fastest rate in survey history”? It will be interesting to see what happens to the self-employment numbers as the labour market tightens. I am not sure it should be a great concern right now.

  1. October 17, 2014 at 11:55

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