This has turned out to be a week when central bankers have been determined to put their views forward, at least in Europe. A factor in this is that bond markets have decided to either look through the “higher for longer” mantra for interest-rates or simply do not believe it. In the recent trading range we have seen the US ten-year yield some 0.5% to 0.6% lower than the peak phase. I do not think there has been any change in the worries about the trajectory of fiscal policy, but there has been a shift in interest-rate views.

So we can switch to someone who has been an advocate of the higher for longer claims as the Chief Economist of the Bank of England has been interviewed by the Financial Times. Poor old Huw put his foot in his mouth again recently so no doubt a safe interview with the house journal is just what his doctor ordered. Let us start with his original claim.

He has championed the notion that policy will need to remain restrictive for an extended period of time given how sticky inflation is proving — an approach he dubs “Table Mountain” after the South African landmark.

Even the Financial Times cannot avoid pointing out that Huw seems unable to stick to one story.

But a few days before we spoke, he wrongfooted markets by suggesting it was not unreasonable for them to expect rate cuts next year.

Actually he wrong footed himself I would say. So much so that the Bank of England tried to deny he had actually said it.

More kudos to the Treasury Select Committee for calling out the BoE’s “running commentary” on policy. Jonathan Haskel forced to say Huw Pill was “misquoted” when talking of rate cuts next year. By “misquote” did he mean “misspoke”? ( @LaurieLaird5)

Seeing as the Financial Times is publishing it as a fact Jonathan Haskel has some explaining to do. Returning to Huw Pill he is now back to higher for longer in his interview.

Pill took great pains to avoid repeating that message in our conversation last week, striking a decidedly hawkish tone on monetary policy.

In which case he needs to have a word with some chap called Huw Pill who warned about the dangers of this in early August.

The Bank of England risks raising interest rates too far in its attempt to get inflation back under control, its chief economist has admitted.

Huw Pill, chief economist at the Bank, conceded “it is possible that we do too much” to rein in price rises as analysts warned that over-tightening would push the country into an “unnecessary recession”. ( Daily Telegraph)

As you can see our valiant Chief Economist has been in the process of occupying quite a few positions on interest-rate policy. I suggest taking a little care with thinking that one of them has to be right as so far his track record suggests none of them will be! I have previously echoed the Jose Mourinho phase of someone being a “specialist in failure to describe his performance so far. I can refine that as the original use of the phrase about Arsene Wenger ignored that there is much to admire about him. Whereas if there is much to admire about Huw we have yet to see it.

Theoretical Problems

If the above was not a problem enough our Huw seems determined to double-down on his problems. Let me return to the FT interview.

As part of the core team led by BoE governor Andrew Bailey, Pill has been seeking to better understand the drivers of the inflation while simultaneously seeking to improve the Bank’s ability to communicate the best way out.

Firstly after the inflation forecasting disaster I would avoid the use of the word core like the plague. As to communication Huw keeps singing along with Spandau Ballet.

Communication let me down
And I’m left here
Communication let me down
And I’m left here, I’m left here again.

In an ordinary world one might think it reasonable to try to understand inflation better albeit that if you are going to pay someone nearly £200,000 a year you might have checked that before you employed him. But my contention all along about the central banking inflation failures is that they preferred theory over reality time and time again. Huw seems determined to keep banging his head against that particular wall.

There’s a view that the medium-term equilibrium rate of unemployment, the Nairu, may have risen somewhat. That is associated with a recognition, I think, that the ability of the labour market to match unemployed people to vacancies in the economy — we have a lot of vacancies still — has been less effective than we had judged in the past.  ( FT)

There is quite a long list of obvious problems here. Let me pick three.

1 The Bank of England started using the unemployment rate when Governor Carney highlighted 7% just over a decade ago. The fact they now use 4.25% shows the shambles it has been.

2. Using the labour market as a guide when the Office for National Statistics has just abandoned many of its long-running series is especially dim in the light of the above.

3. Vacancies. Really?

Anyway Huw has either not thought of this or is undeterred by them as he ploughs on.

And so the degree of tightness in the economy — and particularly in the labour market, owing to that supply-side disruption — is probably greater. And behind that, to use a bit of jargon, is a view about the slope and the position of the Beveridge Curve, which maps vacancies into unemployment.  ( FT)

I would say you really couldn’t make it up! But of course he just has and that is the nub of the problem. This has two further problems.

Judgments we make about the persistence of developments in wages and prices can come from the fact that there [is this] deterioration in labour market performance, but also from interactions in that wage-cost-price dynamic. On both dimensions, we took a more pessimistic view.

It does not matter how often they get things wrong hey seem to think there is value in their view. Which is essentially to repeat a “more pessimistic view” and in the way that someone buys a lottery ticket hope one day to be right. It is important to note how wrong they have been because not only were we supposed to be in a deep recession right now but the UK economy saw Blue Book GDP revisions of just under 2%. So compared with the Bank of England view the economy is around 4% better off. Most would see that as a combination of better and indeed hopeful news.

So their reaction function is as follows. UK Blue Book 2022 revises down the economy, Bank of England seems this as a pessimistic supply side issue. UK Blue Book 2023 revises up the UK economy by a very similar amount, Bank of England seems this as a pessimistic supply side issue. I think everyone can spot the problem here.

Comment

I can summarise things via the headline used by the FT.

We are making our judgments. The markets are making their judgments’ ( Huw Pill)

The problem for Huw is that he has been so consistently wrong that markets may be heading in the opposite direction because of what has has said. Their only problem is in keeping up with a man of ever changing views. The irony is that when he did get something right it was in fact his worst communication effort.

“I don’t think Huw’s choice of words was the right one”

BOE Governor Andrew Bailey criticises chief economist Huw Pill for saying people in the UK need to accept they are poorer because of inflation ( @BloombergUK from  April)

That for the uninitiated is a savaging in central banking terms with the cake trolley no doubt ordered to bypass his office for quite some time. It may well be that the punishment was added to by being put in charge of monetary policy commincation.

Oh and in case you were wondering how Huw was ever appointed Chief Economist, it was because he is “One of Us”

A former Goldman Sachs and European Central Bank economist, ( FT)