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BONUS: The Bank of England Arrives at a ‘Crunch Point’ · Merryn Talks Money

0:02
Speaker 1: Hello, loyal listeners. Maren sumset web here. I thought we'd
0:06
Speaker 1: bring you yet another bonus episode to the Meren Talks
0:09
Speaker 1: money Feed. It's an episode of another podcast here at
0:12
Speaker 1: Bloomberg called In the City, hosted by Francine Laqua and
0:15
Speaker 1: David Merritt. Every week, Friend and Dave unpack the story
0:18
Speaker 1: that's driving the conversation in the city of London. John,
0:21
Speaker 1: you listen to the show, right.
0:23
Speaker 2: Yeah, it's really good.
0:24
Speaker 3: And if anyone wants to flex through the back catalog,
0:27
Speaker 3: I particularly recommend the wines being Nick Candy and Gay Haines,
0:32
Speaker 3: which are both very interested in some quat tailing quotes
0:35
Speaker 3: from both of those gays.
0:36
Speaker 1: Oh, I have not listened to the Nick Candy one.
0:38
Speaker 3: I'm going to do that.
0:39
Speaker 1: And by the way, while you're looking at back episodes,
0:42
Speaker 1: do listen to our back episodes too. Some of them
0:45
Speaker 1: are really good, right John.
0:46
Speaker 3: Oh, absolutely put into the top of your menu.
0:51
Speaker 1: Anyway. This week their episode is a look at what's
0:54
Speaker 1: next for the Bank of England. Features some familiar voices
0:56
Speaker 1: Bloomberg reporters and columnsts that have joined our show, plus
0:59
Speaker 1: a few new ones. So I do have you enjoyed
1:01
Speaker 1: listening and if you do consider subscribing to in the City.
1:06
Speaker 4: It's the last mile, which obviously where policy is really
1:09
Speaker 4: doing the work, and we're going to have to see
1:11
Speaker 4: policy stay restrictive. Now, the question that is for how long?
1:14
Speaker 2: Right, That's a question I'm.
1:16
Speaker 4: Afraid the answer is because we don't know at the moment.
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Speaker 4: That's why we say for sufficiently long to have its effect,
1:21
Speaker 4: because it's too soon to judge really how long that's
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Speaker 4: going to take.
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Speaker 2: Welcome to in the City, Bloomberg's podcast, connecting you to
1:34
Speaker 2: the conversations at the heart of the City of London.
1:37
Speaker 2: I'm Francin Laqua and this week a deep dive into
1:40
Speaker 2: the thinking at the Bank of England. Well, at least
1:43
Speaker 2: we try. You just throw the Governor Andrew Bailey there
1:46
Speaker 2: telling me after last week's great decision it is too
1:48
Speaker 2: soon for the UK to declare a victory in the
1:51
Speaker 2: battle against inflation. We're in the last mile, as he
1:54
Speaker 2: puts it, and the last mile will need a prolonged
1:57
Speaker 2: period of restrictive interest rates.
1:59
Speaker 5: Is right.
2:00
Speaker 2: Let's bring in the Bloomberg brain trust. On the BOE
2:03
Speaker 2: we have Bloomberg opinion columnist Marcus Ashworth, the brain of
2:07
Speaker 2: Bloomberg Opinion on economics from our Bloomberg Economics team and
2:11
Speaker 2: Andrede and our reporter recovers the Bank and the Governor
2:14
Speaker 2: of Bailey, Tom res So, thank you all. So why
2:17
Speaker 2: do we care, Marcus about the Bank of England Because.
2:21
Speaker 6: They are at the risk of potentially putting our economy
2:23
Speaker 6: into a recession when they have no need to. And
2:26
Speaker 6: they have also tightening monetary policy in a way and
2:30
Speaker 6: a manner which is faring very hard to read. Perhaps
2:33
Speaker 6: the communication skills have been severely lacking. They've stopped started
2:36
Speaker 6: and perhaps not have their own confidence of I think
2:39
Speaker 6: looking out the window and really realizing what's going to
2:42
Speaker 6: happen next, And principally I think they haven't been patient enough.
2:45
Speaker 2: Yeah, and so we're going to go pretty in the
2:47
Speaker 2: weeds about inflation, forecasting, mean averages and things like that.
2:51
Speaker 2: But actually people need to care about central banks when
2:53
Speaker 2: an economy could be on the brink because it changes everything.
2:56
Speaker 4: Tom.
2:57
Speaker 7: Yeah, I think we're a real crunch point where it
2:59
Speaker 7: could go to ways, and I don't think the Bank
3:02
Speaker 7: of England knows definitely which way it's gone. We know
3:05
Speaker 7: we've had we've had that softer inflation print in June,
3:08
Speaker 7: which is given as a glimmer of hope after some
3:10
Speaker 7: really grim data earlier in the year, but it could.
3:13
Speaker 7: I think it's still very much for grabs which way
3:15
Speaker 7: it goes. And I think we're on a real you know,
3:18
Speaker 7: having a real crunch point.
3:19
Speaker 2: Yeah, we underestimate really the power of central banks to
3:22
Speaker 2: make or break in economy.
3:24
Speaker 5: Yeah, I think it's just important. I think people are
3:25
Speaker 5: interested in knowing, you know, why is inflation still high?
3:30
Speaker 5: Whose whose fault is it? I think essentially that's kind
3:32
Speaker 5: of the question. A bit is it is the government
3:34
Speaker 5: to blamy is de Beuty? But yeah, I think it's
3:36
Speaker 5: important to kind of unpack what different you know, institutions
3:39
Speaker 5: could have done differently.
3:40
Speaker 2: What do you think the governor's doing now, Marcus Well.
3:43
Speaker 6: I hope he's thinking long and harder all these doings
3:45
Speaker 6: to the UK economy and what on holiday he doesn't
3:50
Speaker 6: deserve to be on holiday, and my humble opinion he
3:52
Speaker 6: seems to go back and relearning some economic principles. But yeah,
3:56
Speaker 6: I do think that the Bank of England are buying
3:58
Speaker 6: time at the moment, the whole construct and interestingly, what
4:02
Speaker 6: they've done with their latest quarterly economic forecasts tells you,
4:07
Speaker 6: you know, some says that they are they are more
4:10
Speaker 6: confident than they were in the last one in May
4:13
Speaker 6: over where their inflation is. And that's because they've you
4:16
Speaker 6: can see they've raised actually their expectations for inflation, but
4:20
Speaker 6: their margin of area of you want together or their
4:22
Speaker 6: confidence is increased, and I think they're building in themselves
4:26
Speaker 6: a big buffer. We also saw a chief economists pill
4:29
Speaker 6: come out and say that he thinks food prices are
4:32
Speaker 6: going to be high and remain high at ten percent
4:34
Speaker 6: or higher. I actually think they won't be. I think
4:37
Speaker 6: he doesn't think there will be either. But they'd rather
4:39
Speaker 6: be wrong with inflation falling faster.
4:42
Speaker 2: Mark, I think. I mean, I think you're harsh. Okay,
4:45
Speaker 2: I've told you this before, and I don't know whether
4:46
Speaker 2: whether Tom and agree with me.
4:48
Speaker 6: But it's nice.
4:51
Speaker 2: It's a beautiful thing, right. Well, I mean they could
4:54
Speaker 2: have maybe hiked quicker interest rates, but they're trying to
4:56
Speaker 2: play catch up.
4:58
Speaker 6: You want me to be really harsh, right, I should
5:01
Speaker 6: not talk about negative rates last year before that, they
5:03
Speaker 6: should not have have faft around as they did. They
5:06
Speaker 6: got the first hiking just right. Yeah.
5:10
Speaker 7: In Marcus's defense. I think there is a moment last year.
5:13
Speaker 7: I think it's the Dune meetings. The BOE raises interest
5:16
Speaker 7: rates by only twenty five basis points and the FED
5:20
Speaker 7: the day before did it by seventy five basis points,
5:23
Speaker 7: and you can just see that's the moment where they
5:25
Speaker 7: funloaded a lot more than we did. And I think
5:29
Speaker 7: the consequences are bearing out. So I do have some
5:31
Speaker 7: sympathy for your view markers.
5:33
Speaker 5: I agree with on the moment where they could maybe
5:36
Speaker 5: have acted differently was kind of over the summer. We
5:39
Speaker 5: had a lot of you know, data showing that you know,
5:42
Speaker 5: price pressures are very high, the liber market was very tight,
5:45
Speaker 5: but I don't know if you remember as well, and
5:47
Speaker 5: I think this is the key contrast with what was
5:49
Speaker 5: happening in the US was that we had a major
5:51
Speaker 5: energy shock that was going to deliver a big income
5:54
Speaker 5: squeeze that the US just didn't have. So in a way,
5:57
Speaker 5: the BOE was kind of to a certain extent, real
5:59
Speaker 5: life on the real income squeeze, doing a lot of
6:02
Speaker 5: the job for it. And then you know, we had
6:04
Speaker 5: these changing energy prices at the start of the year,
6:06
Speaker 5: so that changed the outlook completely and I think it
6:08
Speaker 5: was over the summer that consumer confidence indicators were just
6:12
Speaker 5: hit like historical laws. So the situation was pretty grim.
6:15
Speaker 5: And maybe now with a insight, yes, a couple of
6:18
Speaker 5: more of seventy five's could have been done. But deciding
6:21
Speaker 5: that at that time, I think it would have been difficult.
6:24
Speaker 2: Is it also down the composition of the NPC, the
6:26
Speaker 2: way that everybody gets a vote and it's the same
6:27
Speaker 2: vote that makes it more difficult to see the overall direction?
6:30
Speaker 2: Or was it a problem with forecasts?
6:32
Speaker 7: It seems like it was more problem forecast and as
6:36
Speaker 7: some of the races that has admitted that, you know,
6:38
Speaker 7: Hugh pill has talked about kind of the way their
6:41
Speaker 7: forecasts have looked at the shocks and what would happen
6:44
Speaker 7: with the shocks, They haven't quite worked in the way
6:47
Speaker 7: they thought they would in I don't know whether they
6:49
Speaker 7: thought the shocks would come out of the inflation figures
6:52
Speaker 7: quicker than it has done. So I think it seems
6:55
Speaker 7: to be a problem with the forecast and maybe that's
6:57
Speaker 7: why we're having the bananky review.
6:59
Speaker 6: Yeah, well, great, get the Master of Modern QWI and
7:03
Speaker 6: asset price bubbles from Mark your homework, which tells me
7:06
Speaker 6: their entire econometric model has failed. Their whole view from
7:11
Speaker 6: going back well before inflation took off, was looking completely
7:15
Speaker 6: their ong direction. As I mentioned earlier, negative rates, which
7:18
Speaker 6: they were enforced on the entire UK banking system to
7:21
Speaker 6: prepare for and then continue doing QE up the end
7:25
Speaker 6: of twenty twenty one. Even technically after they'd raised rates,
7:29
Speaker 6: they were still adding and buying QE. They completely refused
7:33
Speaker 6: to understand and accept and they just simply rely on
7:36
Speaker 6: a forecasting model rom than look out the window. And
7:38
Speaker 6: that's my basic problem with the Bank of England. They
7:39
Speaker 6: ignored Haldane, who the chief economist. They've ignored a number
7:43
Speaker 6: of different people, their group think within and their conviction,
7:47
Speaker 6: and then their whole approach and reliant on a model
7:50
Speaker 6: which has failed them is where they are continuing to
7:52
Speaker 6: make mistakes. And the risk now is that having made
7:55
Speaker 6: a big mistake and not hiking too early and not
7:57
Speaker 6: seeing how much stimulus are putting in. But they're not
8:00
Speaker 6: in the opposite and overdoing it.
8:02
Speaker 2: Harsh, I mean, Marcus Harshest, get harsh, I really.
8:06
Speaker 5: Can I agree that the models were kind of maybe
8:10
Speaker 5: not well suited for this kind of inflationary shock. That
8:13
Speaker 5: we're leaving now. I don't think that's necessarily a problem
8:16
Speaker 5: of the Bank of England per se. I just think that,
8:20
Speaker 5: you know, the Ason was saying, it was kind of
8:22
Speaker 5: the persistence that they like, I mean that the size
8:24
Speaker 5: of the shocks they couldn't have anticipated because you know,
8:26
Speaker 5: they like there was the Russian War and that that
8:30
Speaker 5: drove energy and food prices. But I think the way
8:33
Speaker 5: that they do their modeling is not widely different than
8:37
Speaker 5: other central banks do it, I think exactly.
8:42
Speaker 2: Yeah, yeah, no, no, no, no, no.
8:43
Speaker 5: And just to say that, I think it has been
8:45
Speaker 5: a particular problem here in UK because of you know,
8:49
Speaker 5: the nature of inflation that kind of experienced, because you know,
8:52
Speaker 5: like the US is already benefiting from you know, this
8:54
Speaker 5: inflation process, maybe because they didn't have the big energy
8:58
Speaker 5: shock that the UK in aurozone, you just don't have
9:01
Speaker 5: this kind of hot labor market adding to it. So
9:03
Speaker 5: I think this is what's kind of complicating the Bank
9:05
Speaker 5: of England's position, But it's framework in essence, I don't
9:08
Speaker 5: think it's any difference, and I would just say that
9:10
Speaker 5: I think they've actually been quite humble about it. I
9:13
Speaker 5: think they've been transparent and I think they've been opening,
9:17
Speaker 5: just opening their forecasting process to an external even though
9:21
Speaker 5: you know you can disagree with the choice, but just
9:22
Speaker 5: to step I think it's you know, it hasn't been
9:24
Speaker 5: taken by other central banks.
9:26
Speaker 7: The strange thing is is that there is, actually there
9:28
Speaker 7: has been ever since this inflation surg started, has been
9:32
Speaker 7: quite a lot of diversity of opinion on the NPC.
9:35
Speaker 7: You know, in twenty twenty one we had, as you mentioned,
9:38
Speaker 7: Hal Dane and Michael Saunders both warning about this. You
9:41
Speaker 7: know that how Dame was the Bank's chief economist and
9:44
Speaker 7: he would seem to be basically ignored by Bailey and
9:48
Speaker 7: the other deputy governors. And recently we've had you know,
9:51
Speaker 7: Swatidingra and Tenreiro against Catherine Man, the Bank's chief hawk.
9:56
Speaker 7: So it's not that there's been a lack of diversity
9:58
Speaker 7: of opinion on the NPC. Doesn't seem to have made
10:01
Speaker 7: much difference in how policy is played out.
10:03
Speaker 6: Because the internals have overruled all the externals throughout. And
10:07
Speaker 6: that's but we're not even touched on the way. I
10:10
Speaker 6: do think the banking is different the econometeral models aside,
10:14
Speaker 6: which I'm not being a huge fan of and I
10:16
Speaker 6: don't think they understand what they're looking for.
10:18
Speaker 2: But they could change. Marcus right, but called.
10:22
Speaker 6: There's a thing called active and passive continent of tightening,
10:25
Speaker 6: and that's where the banking are dramatically different from the
10:28
Speaker 6: rest of their peers, and that's where they're compounding the family.
10:33
Speaker 2: So I mean, I remember actually being in a press
10:34
Speaker 2: conference and then having an interview with Governor Bailey afterwards
10:38
Speaker 2: and trying to, you know, understand the linkage. For example,
10:41
Speaker 2: in QT, if if they did QD of a certain amount,
10:45
Speaker 2: how much it would you know, hike interest rates by
10:48
Speaker 2: And they didn't know the answer to that. Should they
10:50
Speaker 2: have known, had.
10:50
Speaker 6: Several different answers, all of them changed according to what
10:54
Speaker 6: suits them. But the basic point is they don't.
10:55
Speaker 2: Know, but they don't know because it's impossible to know,
10:58
Speaker 2: or because.
10:59
Speaker 6: They currently think it's the whole combined of active and
11:02
Speaker 6: passive and the whole approach is only adding there reckon
11:05
Speaker 6: about ten basis points. I've asked them to explain that,
11:08
Speaker 6: and they have not answered it so far.
11:10
Speaker 7: I guess we might get more of an idea of
11:12
Speaker 7: the impact when they stop hiking bank rate and continue QT.
11:16
Speaker 7: Maybe that's when we're see weather is having an impact.
11:18
Speaker 5: On Yeah, I think it's very hard to cut. I
11:21
Speaker 5: think the main tool is still the bank and that's
11:23
Speaker 5: what's kind of you know, having more impact. But I
11:27
Speaker 5: also I wouldn't overplay the importance of models. I think
11:30
Speaker 5: Broadband made this point at the press conference that it
11:33
Speaker 5: is a collective judgment and that will always be the case. So,
11:37
Speaker 5: you know, this review is a step in the right direction,
11:39
Speaker 5: but it might change a bit more on how the
11:42
Speaker 5: bank communicates. I think there might be some room for
11:44
Speaker 5: improvement there, but in terms of bringing in new models
11:47
Speaker 5: or new approaches to forecasting, I think there will still
11:51
Speaker 5: be a big error component that just comes from the
11:53
Speaker 5: fact that, you know, we're all humans.
11:55
Speaker 2: So let's go back to the two percent inflation target.
11:57
Speaker 2: This is set by the government, right, there's not a
11:59
Speaker 2: statute act. He's setting it out like other central banks.
12:02
Speaker 2: So could the government change it.
12:04
Speaker 6: Yeah, I think the government's learned a lesson not to
12:06
Speaker 6: take the bank bingland on and the political sense after
12:10
Speaker 6: debarcle lost autumn throughout that the bank not only continue
12:14
Speaker 6: to raise interest rates but also to go ahead with
12:16
Speaker 6: active corderative tightening, which is the first, and it's all
12:19
Speaker 6: of the only major center way to do so. But
12:23
Speaker 6: the government can lay out a number of different things
12:25
Speaker 6: if it chooses to. But it's quite clear. There was
12:27
Speaker 6: exchange of letters in April between the bank and.
12:29
Speaker 2: You know, I love this. This is such a British quirk, right,
12:33
Speaker 2: So you have to write if you're above target, you
12:36
Speaker 2: write a letter to the chancellor.
12:37
Speaker 6: Yeah it's meaningless, know it's meaningless, and no one ever
12:40
Speaker 6: reads them. But yeah, but I read them, well read
12:48
Speaker 6: that's the art. As I said, you know what they're
12:50
Speaker 6: going to say, and none of it changes anything. But
12:52
Speaker 6: the point is is that, yes, there is a two
12:55
Speaker 6: percent inflation target, which is exactly stand across. You know,
12:58
Speaker 6: as the econometric federals are standard, so's the inflation target.
13:01
Speaker 6: Is there a time to change that? Possibly they could
13:04
Speaker 6: have done it beforehand before. Possibly they may do it
13:07
Speaker 6: after when everything's come down and in the middle of
13:09
Speaker 6: inflation battle. I don't think they will change it, and
13:11
Speaker 6: they should change.
13:13
Speaker 7: Yeah, it'd be crazy to change it in the middle
13:15
Speaker 7: of a time when you're kind of struggling with credibility anyway,
13:18
Speaker 7: I mean, hu Pill was asked about this and he
13:21
Speaker 7: pushed back against many change in the target. But you know,
13:25
Speaker 7: the government's not I mean, the government's changed the bank's
13:27
Speaker 7: remit you know quite a few times recently, I did
13:30
Speaker 7: green bells and whistles, et cetera. So they're not averse to,
13:33
Speaker 7: you know, changing what the bank is targeting.
13:36
Speaker 5: It would be kind of a big hit to their credibility.
13:39
Speaker 5: And I remember exactly having this conversation when infliction was
13:42
Speaker 5: too low, so they also wanted to change the target.
13:44
Speaker 5: So we're going to just keep kind of coming back
13:46
Speaker 5: to this discussion just whenever inflation doesn't play ball. And
13:50
Speaker 5: I think the important thing to say is that historically
13:53
Speaker 5: we've been around the target, the infliction has been around
13:55
Speaker 5: two percent.
13:56
Speaker 6: The point is is that they can within that three
13:59
Speaker 6: year time get range of getting two percent. They could
14:03
Speaker 6: be a lot more flexible about that, and that's where
14:06
Speaker 6: I think they could make a difference that.
14:07
Speaker 2: If the bank or the government.
14:10
Speaker 6: In effect, but yeah, essentially the Bank of England, but that.
14:13
Speaker 2: Would hurt their credibility.
14:14
Speaker 6: Wouldn't know if they if they went about this in
14:17
Speaker 6: a responsible man, they say, look, we definitely think with
14:20
Speaker 6: confidence now that we will get below two percent or
14:22
Speaker 6: at two percent, which they already say by they have
14:24
Speaker 6: for a while, they doesn't have any confidence in their
14:26
Speaker 6: own forecast. But we're more confident in our forecast. We
14:28
Speaker 6: think it will drop to x by y. We therefore
14:33
Speaker 6: will not necessarily have to keep tightening monetary policy because
14:36
Speaker 6: we see the glide path in the right direction, And
14:39
Speaker 6: even though it won't hit two percent by whenever, it
14:43
Speaker 6: will buy an extra timeframe and that more confident on that.
14:46
Speaker 2: But that's essentially what they're saying, not actually backward.
14:50
Speaker 6: Data justify another backward indicator and their hiking distry.
14:54
Speaker 2: I mean private wage sector. Right, They're expecting to fall
14:57
Speaker 2: down six percent by December at the end of the year, right,
15:00
Speaker 2: and it's now it's seven point sve percent. So they're
15:01
Speaker 2: giving forecasts and saying, look, this is a trajectory downwards, right, And.
15:05
Speaker 5: I understand what Marcus is saying. It's essentially how fast
15:09
Speaker 5: do you bring inflation back to two percent? And I
15:11
Speaker 5: think if they stopped now, I think inflation would still
15:14
Speaker 5: maybe settle at two percent, It will just take a longer,
15:17
Speaker 5: longer time. And their job, I think, as I see it,
15:20
Speaker 5: is to just bring you know, get to that target
15:23
Speaker 5: as fast as they can so I think the Bank
15:25
Speaker 5: of England will favor the you know, continuing to hike,
15:29
Speaker 5: so it won't have the patience to see, you know, and.
15:31
Speaker 2: In September, I mean they're going to have what two
15:33
Speaker 2: inflation prints.
15:34
Speaker 5: To inflication, updated job, some more information on the economy
15:38
Speaker 5: as well, which you know has just become a little
15:39
Speaker 5: bit more more important. But just when you compare it
15:44
Speaker 5: to the FED and to THEDCB, I mean they kind
15:46
Speaker 5: of hinted at the pose or post when inflation was
15:49
Speaker 5: around five percent, you know, like by by September inflation
15:52
Speaker 5: will still be seven percent in services, and it's just
15:54
Speaker 5: that I think it's very hard, it will be very
15:56
Speaker 5: hard for the for the BOE to stop there. And
15:59
Speaker 5: then in November, I think it's more of an open question.
16:01
Speaker 5: Our call is that they will continue to hike there
16:04
Speaker 5: again because the level is still too high. There's risks
16:06
Speaker 5: stemming from private sector wage growth. But there I think,
16:10
Speaker 5: you know, the narrative can change because other central banks
16:13
Speaker 5: have passed for longer the economy could tank. So it
16:16
Speaker 5: remains more of an open question. But I think they
16:18
Speaker 5: will prefer to kind of frontal it and be I.
16:21
Speaker 7: Think that was one of the most interesting parts of
16:23
Speaker 7: what Bailey was saying was that he sees several different
16:27
Speaker 7: paths of interest rates to get to the same place
16:30
Speaker 7: I do. Basically, you can leave rates where they are
16:33
Speaker 7: at five point two five percent and you still get
16:35
Speaker 7: to the same inflation rate that you get to if
16:38
Speaker 7: you go up by quite a bit more and then
16:41
Speaker 7: come back down again. And I think there's also this
16:44
Speaker 7: question about how much policy is coming through the pipeline.
16:49
Speaker 7: I mean, we're only just and I think this has
16:51
Speaker 7: forgotten quite a lot. We're only just eighteen months on
16:54
Speaker 7: from the first hike, so we have the first hike
16:57
Speaker 7: in December twenty twenty one. The typical lag of monetary
16:59
Speaker 7: policies always said to be eighteen to twenty four months,
17:02
Speaker 7: so we're only just getting the full effect of that
17:04
Speaker 7: first hike. A lot more to come. So I do
17:08
Speaker 7: wonder whether there is this risk of overtighting give given
17:11
Speaker 7: how much policy is still to come down the truck.
17:13
Speaker 6: Because they just move the goalpost, haven't they, Which is
17:15
Speaker 6: you know they've done it in essence what the ECB's
17:17
Speaker 6: try to do. It's just that they've gone. They get
17:19
Speaker 6: looking at headline inflations that's going to drop very sharply
17:21
Speaker 6: because everything's going to phase out. They are trying to
17:24
Speaker 6: weirdly confuse as a food price inflation, which I think
17:27
Speaker 6: they if they actually look at it, I think that
17:29
Speaker 6: they know they may well surprise on the downside on
17:31
Speaker 6: that side. But they now want to focus on not
17:35
Speaker 6: headline inflation, but on services and particularly on private sector
17:39
Speaker 6: wage levels.
17:40
Speaker 2: But mart they chose the guy. They talk about crystallizing
17:43
Speaker 2: and then this higher for longer idea, which is very
17:45
Speaker 2: similar to what Laguard had.
17:46
Speaker 6: Yeah, that's the moving the gold post that they are
17:48
Speaker 6: following the ECB, which in turns following the Fed.
17:50
Speaker 2: But is that just more prudent, Well.
17:52
Speaker 6: It's just the whole point is, so they're trying to
17:54
Speaker 6: get away from getting blamed, and they've they've altered their
17:56
Speaker 6: inflation forecast in a quite an unusual way, and they've
17:59
Speaker 6: now pushed what they're looking at, and they want to
18:02
Speaker 6: be judged by onto something which is a very lagging
18:05
Speaker 6: and a second round effect, which is principally private sector
18:07
Speaker 6: wage levels, which they've give them a sort of target
18:10
Speaker 6: a six percent down from seven point seven. So it's
18:13
Speaker 6: they want to be judged in a different way and
18:14
Speaker 6: that's because they want that higher for longer plateau because
18:18
Speaker 6: they know they're not going to be at high rates
18:20
Speaker 6: too much more.
18:21
Speaker 2: I was in the press conferences time, trying to actually
18:23
Speaker 2: get time to look at me, but he was so focused,
18:26
Speaker 2: Bailey done didn't even notice me, like two rows behind you.
18:29
Speaker 2: The body language was a bit different right than last
18:33
Speaker 2: time around. I feel like it was a bit more relaxed.
18:35
Speaker 2: I don't know whether their party's more solid.
18:37
Speaker 7: Yeah, I've always they definitely went in there with a
18:39
Speaker 7: message on this high for longer, and they basically ignored
18:43
Speaker 7: any questions that wasn't about that message, and I think
18:46
Speaker 7: that's why things kind of, you know, became a bit
18:48
Speaker 7: dull in the second half. But yeah, he seemed a
18:51
Speaker 7: bit more confident, especially. I don't know whether you got
18:53
Speaker 7: that sense in your interview as well.
18:54
Speaker 2: Yeah, I did. I mean, I think he was more
18:55
Speaker 2: on message. I think he was pretty clear what he
18:58
Speaker 2: was trying to communicate.
18:59
Speaker 5: I mean, I think they they are a bit indeed
19:02
Speaker 5: more relief because they just got this final CPI print,
19:05
Speaker 5: which was what they needed desperately, because I really like,
19:09
Speaker 5: I mean, if you look at the past three months,
19:11
Speaker 5: I mean, if I was on the NPC. It would
19:13
Speaker 5: be kind of you know, freaking out a bit because
19:15
Speaker 5: it's just that, you know, it's contrary to what the
19:19
Speaker 5: it was happening in the Euros and Ere for instance,
19:21
Speaker 5: food prices were just the inflation was just not falling,
19:24
Speaker 5: and there was a question mark as to why, why
19:26
Speaker 5: why is.
19:26
Speaker 6: It just another why should they be looking We can
19:29
Speaker 6: all look at an inflation number. Why do we need
19:31
Speaker 6: the Bank of England all the many thousands of economists
19:33
Speaker 6: to look at things which we can see ourselves. Inflation
19:36
Speaker 6: is a very is a lagging indicator. And the principle
19:39
Speaker 6: now they're moving on to any more you know, lagging
19:41
Speaker 6: in there, which is wage levels. This is looking in
19:46
Speaker 6: the rearview mirror to try and throw it forward.
19:48
Speaker 2: What would you do differently? I mean they also have
19:50
Speaker 2: more more in charge.
19:54
Speaker 6: Just think about that very short d even short tist administration.
19:58
Speaker 5: Can I just yeah, tip in. I think wage growth
20:02
Speaker 5: is a lagging indicator in the sense that it kind
20:04
Speaker 5: of reacts to tightness of the labor market, which by itself,
20:08
Speaker 5: you know, it's kind of the last thing unemployment is
20:09
Speaker 5: the last thing to react. But you can think about
20:12
Speaker 5: it the other way around. Which is and I think
20:14
Speaker 5: this is the experience of the past three months, which is,
20:16
Speaker 5: you know, high wage growth leads to higher increases in
20:20
Speaker 5: prices ahead because and that's what you see in the
20:23
Speaker 5: pm IS. If you look at at least the last
20:25
Speaker 5: three releases of the PMIS, you see that input inflation.
20:28
Speaker 5: Everyone everyone, not everyone, but the services businesses are essentially
20:32
Speaker 5: saying wage costs are too high. And you know, so
20:35
Speaker 5: to that extent, I understand what what you mean? I
20:37
Speaker 5: think you know they're focusing a lot on the on
20:40
Speaker 5: the review mirror. But again, as I said before, at
20:43
Speaker 5: the start of the year, they wanted to pose. They
20:45
Speaker 5: went to and to a conditional pose earlier than the
20:48
Speaker 5: FED and the ACP. So it's not that they naturally
20:51
Speaker 5: wanted to favor this approach in specific, I think they
20:54
Speaker 5: were just really forced by the data and you don't
20:56
Speaker 5: want to commit it the same error kind of twice.
20:58
Speaker 2: Ben bernanke wou governor be happy with that choice. So
21:01
Speaker 2: I've heard it both ways, right that actually he's you know,
21:04
Speaker 2: he's a bit like him, He's he It would be
21:06
Speaker 2: very difficult for Ben Burnank to come in and say, actually,
21:10
Speaker 2: you've really you know, wasted the last three years and
21:13
Speaker 2: got it all wrong. And then I've heard they could
21:15
Speaker 2: have chosen a UK economist and that would have been
21:19
Speaker 2: less of a snub.
21:20
Speaker 6: I actually chose BANANKI by the way, But was it
21:21
Speaker 6: the Bank of England choosing their.
21:22
Speaker 7: Own I thought it was the bank choosing but which.
21:25
Speaker 6: To my mind is ridiculous.
21:26
Speaker 7: But they go, I don't know what I find interesting.
21:29
Speaker 7: They must be so confident that he's not going to
21:32
Speaker 7: lay into the announced it. Yeah, I think I think
21:36
Speaker 7: the big danger about this is that, you know, they've
21:38
Speaker 7: got a lot of criticism for you know, toy MP's
21:40
Speaker 7: on the Treasury Committee and you know Mervin King in
21:43
Speaker 7: the House of Lords, the ex Bank of England governor.
21:46
Speaker 7: I think there was a risk by choosing Ben Bernanke
21:48
Speaker 7: that he's so part of the central banking fraternity that
21:51
Speaker 7: if he pulls his punches, which he probably will, let's
21:54
Speaker 7: be honest, I think there's a there's a risk that
21:56
Speaker 7: it kind of undermines the whole review and toy MPs go, well,
21:59
Speaker 7: it wasn't you know, You've basically got one of your
22:01
Speaker 7: your mates to do this review. And I think there
22:04
Speaker 7: was a risk that it just doesn't look legit.
22:07
Speaker 6: And I think they're going to walk out, and he's
22:09
Speaker 6: going to go into some proper, proper economic theory on it,
22:12
Speaker 6: and it will be all be you know, five thousand
22:14
Speaker 6: pages of this, that and the other, and everyone's going
22:16
Speaker 6: to go, what does that mean?
22:19
Speaker 2: I would love to know what Marcus would have done
22:20
Speaker 2: differently were he where he government. I wouldn't twenty seconds Marcus,
22:26
Speaker 2: what was? What will you have done differently that at
22:28
Speaker 2: the time, and we've all read your problems I.
22:30
Speaker 6: Have said, I've said already they should never have talked
22:33
Speaker 6: about negative rates. They should have never have done q
22:36
Speaker 6: E and certainly stopped it far far quicker through the pandemic.
22:40
Speaker 6: They should have hiked into straights quicker. I personally think
22:44
Speaker 6: they should have started concented tiding before they hight interest rates.
22:47
Speaker 6: It's a very controversial view that one, but we will
22:50
Speaker 6: now not be in a situation and I think they
22:53
Speaker 6: should have been able to, you know, have some more
22:55
Speaker 6: confidence in their own abilities to look out the window
22:58
Speaker 6: and read read the sign rather and rye on ecconomic
23:01
Speaker 6: metrim models, which obviously were never going to work because
23:03
Speaker 6: we've never seen this type of complete shock, which wasn't.
23:06
Speaker 6: I'm not saying it's all the banking resaults, far from it,
23:09
Speaker 6: and the whole fiscal equation we haven't even talked about,
23:11
Speaker 6: which makes it more most impossible for the Bank of
23:12
Speaker 6: England to just understand what's going stop starts.
23:15
Speaker 2: For another episode.
23:16
Speaker 6: Yeah, but what is the day are trying to second guess,
23:19
Speaker 6: you know, fiscal which has been far more important for
23:21
Speaker 6: the last few years since the pandemic. So in that sense,
23:25
Speaker 6: they got it all wrong.
23:26
Speaker 5: I would agree that there's still that open question on
23:29
Speaker 5: the real effects of QI. I think at the time
23:32
Speaker 5: it looked like the right the right approach, and I
23:34
Speaker 5: think we were talking about, you know, very adverse scenarios
23:38
Speaker 5: where the risks were too high. So I think QUI
23:40
Speaker 5: probably was the right message, but you know, we don't
23:41
Speaker 5: have the verdict on that. There was an interesting speech
23:44
Speaker 5: I think from Broadband where he kind of made the exercise, Okay,
23:47
Speaker 5: if we wanted to fully upset the inflation that we
23:50
Speaker 5: got right now with monetary policy, what would have we
23:53
Speaker 5: done differently? And that would have mean if you considered
23:56
Speaker 5: the lags in monetary policy, that are the eighteen months
23:58
Speaker 5: that would have been kind of maybe starting hiking, you know,
24:01
Speaker 5: in the first lockdown, and maybe hiking by taking rates
24:04
Speaker 5: to double digit interest rates and is getting infatious and
24:09
Speaker 5: maybe also like you know, creating a bigger you know,
24:11
Speaker 5: and I mean people are concerned now about the risks
24:14
Speaker 5: to unemployment and to the economy, but taking rates by
24:17
Speaker 5: as high as they would need to go to fully
24:19
Speaker 5: offset this inflation shock, then that would kind of you know,
24:22
Speaker 5: kill the economy as well.
24:23
Speaker 2: I think, Tom, the central banks always get a hard
24:25
Speaker 2: hard time, especially if Marcus's environmental podcast when we're in it.
24:30
Speaker 2: I mean, can you only really judge a central bank
24:32
Speaker 2: policy like five years or ten years after it's done,
24:34
Speaker 2: because we actually really don't know how inflation plays out.
24:38
Speaker 2: Marcus is so happy with what I've just headed.
24:41
Speaker 7: Yeah, Floris, I think there is I think it's fair
24:44
Speaker 7: to basically say, you know, the where inflation is now,
24:47
Speaker 7: it's four times the two percent target. I know a
24:50
Speaker 7: lot of that is to do with external shocks that
24:52
Speaker 7: they can't control, but they can control the more domestically
24:56
Speaker 7: generate inflation that has now replaced you know, the energy
25:00
Speaker 7: food chops in being the main drive inflation. You look
25:02
Speaker 7: at how much energy, say, is part of the current
25:06
Speaker 7: inflation rate is very, very small, and so they do
25:09
Speaker 7: have control over those second round effects. And you know,
25:12
Speaker 7: they probably should have gone earlier, as Marcus says, not earlier,
25:16
Speaker 7: so they should have floaded it more as well.
25:19
Speaker 6: Cheers.
25:20
Speaker 2: Thank you oh for joining us, and thanks for listening
25:22
Speaker 2: to this week's in the City. We'll be back next
25:24
Speaker 2: week in the meantime. If you like our show, please
25:26
Speaker 2: head on over to Apple Podcasts or wherever you listen to podcast, rate,
25:29
Speaker 2: review and subscribe. Also listen and watch now. Also read
25:35
Speaker 2: Marcus pieces and also Tom stories and Anna's Great financial reviews.
25:43
Speaker 2: This episode was hosted by me friend Sinelak, was produced
25:45
Speaker 2: by Summersati and Jil Namazi. Additional editing by Blake Maples
25:49
Speaker 2: and special special banks to Marcus Ashworth, Tom Reice and
25:52
Speaker 2: and Andrade