Recent hawkish pronouncements from Bank of England members have been dismissed as yet another attempt by Carney to shake up any complacency in the lower-for-longer crew. After all, he explained that was precisely the goal of his Mansion House speech last year: ‘We were concerned that markets were not reacting to a fairly long run of data that had been as expected, if not a little better, and there had not been a change in the prediction for the first rise in interest rates’.
This misses the point. Sure, any central banker about to deliver the first rate rise after the extraordinarily low monetary policy of the past 7 years would want to get some volatility going before they started, to avoid too much taking place on the day (take note, SNB). But the recent BOE comments have not been just about raising the spectre of a rate rise. The hawks are lining up because they are ready to go.
Exhibit A: June 25th – Minouche Shafik, usually the most reticent and least independent thinker on the MPC, puts out an unbelievably hawkish research piece on the econogeek website VoxEU, arguing the market is ‘overly gloomy’
Exhibit B: June 26th – Martin Weale gives an interview to the FT where he points out the jobs market is ‘fizzing away nicely’
Exhibit C: July 14th – uberdove David Miles uses all of his final comments as an MPC member to point out ‘Now is closer to the right time to start a gentle amble back towards a more normal setting for monetary policy,” . And now he’s left the MPC he gives an interview to the Sunday Times on August 16th that “there was at least a case for starting the journey [to higher rates] now’
Exhibit D: July 16th – Carney not only talks about the decision to hike rates coming ‘into sharper relief around the turn of the year’, but lays out what the path should be
Exhibit E: August 17th – Kristin Forbes burnishes her hawkish credentials, noting that ‘inflation could recover faster than we thought‘ and warning ‘unfortunately monetary policy works with lags much longer than a sunburn affects your skin. An increase in interest rates is generally believed to take somewhere from one to two years to have its maximum impact. Maintaining interest rates at the current low levels during an expansion risks creating distortions‘
Exhibit F: McCafferty actually voted to raise interest rates in the August meeting. Not thought about it, or talked about it, but actually voted for it. How many Fed dissenters have actually voted to raise rates in the past 7 years?
And yet, the market pricing for the first hike remains always at least 3 months behind the Fed, and right now has been pushed all the way back to June 2016. Note Miles’ comments: “One thing the monetary policy committee [MPC] will not do, and never has, is just follow another big central bank; it is a daft idea that we cannot raise rates in the UK before the US and also cannot be long behind them,”
So he has now left the committee and a new man is joining in September, which some argue means a hawk has left.
But you only need 5 to vote for a hike. 1 already has and at least 2 more are close to that decision (Weale, Forbes), while 2 others are leaing in that direction (Shafik, Carney).
What if this time there really is a wolf?