Trash Talk Is the Wrong Language for Central Bankers

4 months ago 9

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(Bloomberg Opinion) -- It's never a great sign when a central bank governor says his country's predicament is a “pretty sad story.” That's how Bank of England Governor Andrew Bailey described the UK at the Federal Reserve symposium in Jackson Hole, Wyoming, last week. He said weak productivity and poor labor participation present an 'acute challenge' for raising potential growth. This is well-trodden ground among economists, but from the central bank head it comes very close to criticizing the government. There has been a noticeable chill recently in communications that could be considered blame-shifting.

One might see these comments as a precursor for announcing interest-rate cuts or even stopping quantitative tightening. But that’s now how the BOE rolls; in fact, by muddying the waters Bailey was aiming for quite the opposite — to buy yet more time to maintain the highest benchmark rate in the Group of Seven to see how economic indicators pan out. If inflation is genuinely heading much higher or too close to prevailing gilt yields then it's the BOE's clear duty to act.

Despite widespread problems with the quality of the Office for National Statistics data, notably on the labor market, Bailey is drawing some pretty firm conclusions where it suits him. Almost in the same breath, he contradicts his own analysis by querying whether the problem may be overstated — “it is also possible that those who are not participating in the economy are participating more in completing the labor force survey.”

Riddle me another obfuscating paradox. Evidently, he sees fiscal policy bearing the responsibility for sorting any of this out and not his monetary toolbox. Independence in central banking is a noble concept but it does need to be seen to be doing a good job.

Bailey has frequently mentioned his fear the UK economy has a 'speed limit,' although he fails to specify such a nebulous concept. Nonetheless, the impression is that the 1.3% growth rate Bloomberg Economics expects for this year is pushing up on that boundary. Rather than wave an interest-rate easing carrot to boost growth as tariffs and prospective tax rises cloud the economic horizon, he prefers to wield a metaphorical stick warning of potential inflationary triggers. Meanwhile, the Resolution Foundation expects UK unemployment to reach 5% in the August release, a sharp jump from June’s 4.7%.

Charitably, Bailey’s rhetoric just might be a governor's trick to keep all options open for the next quarterly monetary policy review on Nov. 6. The center of gravity has shifted on the Monetary Policy Committee, with four of the nine members voting for no change at the last meeting on Aug. 7, when official rates were only narrowly cut 25 basis points to 4%. It required an unprecedented second vote to secure this fifth consecutive quarterly cut.

Tellingly, the two MPC members most involved with preparing the quarterly analysis, the deputy governor for monetary policy, Clare Lombardelli, and Chief Economist Huw Pill, were both on the hawkish side. For Lombardelli, who is in charge of enacting the proposed reforms from former Fed Chair Ben Bernanke's review, this was the first time since she took the role last July not to vote with the governor. Bailey appears at risk of losing his in-house team if he pushes too aggressively for more cuts when headline inflation is expected to rise to 4% by September - which will be the most recent data at the November review.

The role of our monetary overlords is to look through short-term troughs or peaks to try and reason whether its 2% inflation target will be achieved in the medium-term. All of the BOE's recent three-year forecasts expect precisely that. CPI is expected to average 3.5% this year and fall back to around 2.5% next year, still nominally above target but certainly within control. Its preferred core services inflation gauge, which excludes more volatile items and indexes, slipped a notch in July to 4.1%, all in line with its predictions. There is no sudden panic here on inflation. But to divine anything clear from recent BOE speak is beyond me.

Life might get a bit easier for the BOE if the Fed does deliver a rate cut at its Sept. 17 meeting. Although Bailey would never admit it, getting ahead of the US in a rate-cutting cycle is beyond his comfort zone. Perhaps if others do the heavy lifting for him, then he can desist from trash-talking his own economy.