Mmmm …… so Bank of England (B of E) governor, Andrew Bailey, admits there are “very big lessons to learn” in setting monetary policy after the B of E failed to a) foresee inflation on the horizon b) did nothing even when it was glaringly obvious problems were brewing c) believed it was all ‘transitory’ and d) shamefully attempted to shift the blame away from him and his Monetary Policy Committee (MPC) members.
Regular readers will be aware we’ve had it in for Bailey and his superannuated chums for a long time, so we’re not jumping on any bandwagon. Bailey told the House of Commons Treasury Select Committee (another grotesque pantomime of self promotion) that the B of E’s forecasting model was not delivering accurate results and the committee had reduced its role when setting rates. Good grief, Mr Bailey, it’s not the model’s job to set rates; it’s yours and whatever model you’re using, it’s only as good as both the information inputted and the validity of initial construction. Furthermore, if you’re relying on a model already in existence, what is the point of the MPC in the first place? Bailey went on to say that instead of using the model’s results the B of E would now think hard about “how we operate monetary policy in the wake of very big shocks”. He’s trying to muddy the waters by invoking just about any exogenous event he can think of; Putin, Covid, Brexit, Megxit, Phil, Holly ……
Bailey would not discuss whether rates would rise further after the B of E raised to 4.5% last month. This represented the 12th consecutive increase and is a damning indictment of how behind the curve the MPC has been. “I can’t tell you that we’re near to the peak or at the peak but we are nearer to the peak” he opined. Not exactly Confucian, is it? How can it not be the case that after increasing borrowing costs, we are closer to the peak? It’s as useful as pointing out that every day after last Christmas we are closer to next Christmas. In other news, the Titanic has sunk, JFK’s been assassinated and Russia’s invaded Ukraine.
Chief economist, Huw Pill, said the bank’s model failed to foresee recent extreme shocks to energy and food prices because they were based on periods without such shocks. So why slavishly follow it, then? He obviously knew this ex ante yet still idiotically deploys it as an excuse. And as for energy, the price of crude has been below that achieved on the eve of Russia’s invasion since the end of last summer, so that’s a total red herring. It’s ‘core’ inflation (ex food and energy) that is now proving ‘sticky’ which might just suggest that profligate governments and their central bank enablers have unleashed a global wave of structural inflation. In addition, if they didn’t know how we got here, who has the confidence they’ll manage to navigate a successful exit? Put me down as a naysayer.
But, as we’ve said before, it’s not just the B of E. The European Central Bank and the U.S. Federal Reserve are cut from the same cloth. Both have hopelessly missed their inflation targets by keeping rates too low for far too long. These people are so arrogant they cannot contemplate their ‘models’ don’t work even when it stares them in the face. They want the world to be how they believe the world should be rather than how it is. It’s a classic case of ‘emperor’s new clothes’ and I suspect a hefty chunk of their collective hubris results from the majority of them never having held a proper private sector job; the real world representing the only economic laboratory that matters.
The B of E has just announced it is to measure the carbon footprint of its money as part of Threadneedle Street’s net zero push. Talk about mission creep; it needs to get its metaphorical head back on the day job of setting sensible borrowing costs and hitting inflation targets. Returning to Mr Bailey’s comment regarding “very big shocks” derailing monetary policy, I reckon the biggest shock of all is how this man and his committee are still employed.
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John Newsome can be contacted on 01423 705123 or john.newsome@williams-im.com. Williams Investment Management LLP is authorised and regulated by the Financial Conduct Authority.
