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Stewart Cowley: letter to Mark Carney

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Stewart Cowley: letter to Mark Carney

It’s been about a year now since I wrote to you welcoming you on board the lumbering edifice that is the Bank of England, whilst simultaneously giving you a couple of patronising pointers for your first year.

We can only hope you found the coffee machine by now, but given the legendary labyrinthine nature of the corridors of your institution that is by no means certain.

But what you will almost certainly have discovered is that if the governor of the Bank of England stands up at the Mansion House dinner and tells people interest rates are going up soon they will take him/her all too literally.  

Looking back at my previous letter to you, I am delighted to say that you have actually done some of the things that I suggested but have ignored some other points.

We still, for instance, don’t know from the recommended just-for-fun on-line personality test which Game of Thrones character you most resemble. Poor show.

However, you have launched a value-for-money review at the Bank of England and begun the process of getting some fresh blood onto the Monetary Policy Committee. Good show!

So what of the year to come? Here are some pointers;

Let money supply be your friend

Everybody appears to be getting very confused about what is going on in the UK economy.

In the same way 'Africa' isn’t a country, 'London' isn’t the UK and the London housing market isn’t of any interest to the people of Llanethli, Lancaster or somewhere in the North East beginning with the letter 'L'.

I know it’s a bit 80’s, but one really doesn’t have to look much further than our pathetic levels of broad money supply growth to understand the UK economy.

Without credit growth capitalism can’t survive or flourish. In your shoes I’d let everybody know that interest rates aren’t moving until this gets going.

Stop talking up the pound

From the moment you arrived at the Bank the pound started to appreciate. Call it coincidence or call it causality but it’s now getting slightly embarrassing and, what’s more, having uncomfortable effects.

It’s holding back the stock market for one thing – so much of our earnings come from abroad and it does nothing for how people view our companies if their profits are being whittled away by a rising pound.

A couple of soothing words – the antidote to the ones delivered at the Mansion House which sent sterling up 1.5cents during the Brazil v Croatia match! – would be useful.

We get it:  you’re a Minsky kindda guy

Personally, I’m not convinced the Monetary Policy Commitee  wants to move interest rates. I suspect the Bank would rather keep busy with administrative things instead at this stage of the cycle.

To me this has the whiff of the economist Hyman Minsky and his 'all financial institutions are inherently unstable' and need regulatory straightjackets-type ideas about it.

Slogans like 'acting as one Bank' when describing the coordination of the Monetary Policy Committee, Financial Policy Committee and the Prudential Regulation Authority sort of give it away and should have your average member of the Civil Service Club in Great Scotland Yard coughing up his Prince de Guyene Bordeaux of an evening at the very thought of such displays of collectivism.

But, in reality, what it really says is that the Bank is spending a lot of time on administrative cleanliness rather than preparing for an imminent rate rise. This should be more widely appreciated – the markets will reward you for it (see Stop Talking the Pound Up).

The Gilt Market

Please stop reinvesting the money from gilts maturing within the Asset Purchase Facility’s portfolio back into the gilt market.

Gilt investors are getting a rotten deal as it is, and it really doesn’t need to be competing with the Bank for them given the meagre yields on offer.

I mean 2.6% for ten years is not really what our pensioners deserve. Besides, we still rely on the kindness of strangers since we are running a chronic budget and current account deficit still so you don’t want to put them off with artificially low gilt yields.

Tell Scotland how much it will cost to have their own Central Bank

The cost of setting up an Independent Scotland (or iScotland as I like to call it) has been variously set as £200 million or £2 billion.

Obviously, Scottish separatists have jumped on the lower number to justify their cause but couldn’t the Bank just inject a bit of realism into the whole thing and let them know, from your own experience, what the Scottish public are letting themselves in for if they vote “Yes”?

They are, at the least, going to need their own MPC, FPC and PRA and all that comes with it. The consultancy costs alone would surely come in at the lower figure.

Besides, tell them that, if they do go it alone, they will have to scrap their notes that London taxi drivers complain so bitterly about and us our sterling bank notes (which they will be forced to use should the Chancellor allow them to use the pound).

Just for mischief it might be fun for the new notes to carry a picture of Margaret Thatcher on them just to remind them who’s still in charge of monetary policy.

All the best,

Stewart Cowley

Investment Director Fixed Income and Macro, Old Mutual Global Investors

+ rated Cowley runs the Citywire Selection Old Mutual Global Strategic Bond fund, which has returned 33% in the five years to the end of May versus a sector average of 30.3%.

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