Bank of England Governor Mark Carney’s “sea change” speech this week has laid the foundation for a dovish MPC shift in August, with a rate cut possible if economic news continues to deteriorate and the Fed goes first at its 30-31 July meeting.
Governor Carney blames global economic deterioration on a confidence shock from trade wars but the dominant driver has been monetary weakness due to excessive policy tightening in 2017-18 – including by the Bank of England. Global narrow money trends were slowing rapidly before the US administration ramped up its trade offensive in early 2018.
UK money trends have been ringing alarm bells for over a year. Annual growth rates of narrow money and broad liquidity fell steeply after the November 2017 rate hike and are currently the lowest since 2011-12 – see first chart*.
Corporate money trends have been giving a recession warning, with the six-month change in real narrow money holdings of private non-financial corporations (PNFCs) turning negative in March / April – second chart. A small recovery in May was welcome but does not negate the earlier signal.
MPC easing would be embarrassing for professional economists, most of whom projected that rates would rise in 2019 – none of the forecasters surveyed by the Treasury in the three months to January 2019 expected Bank rate to finish the year below its opening level of 0.75%.
*The preferred measures here are “non-financial”, i.e. they cover money holdings of households and non-financial firms but not non-bank financial institutions such as fund managers and securities dealers – holdings of the latter group are unrelated to spending on goods and services. The broad liquidity measure (“M4++”) includes foreign currency deposits and National Savings, and adjusts for retail mutual fund flows. The Bank of England’s M4ex broad money measure has shown similar weakness.