ut nine economists in a room and then ask them where interest rates should be heading. In my experience, some will say “up a bit”, some “down a bit”, while others will sit on the fence, preferring to do nothing whatsoever. Reaching any kind of consensus is nigh on impossible.
Yet consensus is exactly what the Bank of England’s Monetary Policy Committee (MPC) achieved earlier this month. Eight men and one woman gathered in a room, discussed the economic outlook and collectively concluded that the UK economy needed a rate increase. No dissent, no disagreement, no alternative view. Apparently, the evidence was there for all to see.
The MPC has met on almost 250 occasions since its inception in 1997. Prior to this month’s meeting, only 10 gatherings had been associated with a unanimous decision to raise interest rates. Four were in 1997, when a fledgling and understaffed MPC was finding its feet. Four were in 2004 when the UK was growing quickly and the world economy was also doing very well.
The other two were in January 2000, just ahead of the global stock market crash, and in May 2007, a few months before the run on Northern Rock. In both cases, dissent emerged relatively swiftly: and dissent was followed by a rate cut within the space of a year. In hindsight, raising rates on these two occasions appears to have been a mistake: examples, perhaps, of blind hawks leading gullible doves.
Given this history, August’s unanimity suggests either that the evidence in favour of higher rates is overwhelming or that the MPC has made one of those decisions it will live to regret.
Surprisingly, the minutes from this month’s meeting are full of doubt. Reflecting on recent economic developments, the Committee notes that retail sales had “bounced back” after earlier weather-induced weakness and “there were a number of signs that the labour market was beginning to tighten”. However, “the near-term outlook for the global economy appeared to be a little softer [and] there were tentative signs that actual and prospective protectionist policies were starting to have an adverse impact”. There were “question marks around the rotation of [UK] demand, away from household consumption and towards net trade and business investment” partly reflecting “uncertainty around the UK’s future trading arrangements” with the EU. Inflation, meanwhile, was a smidgeon lower than expected.
Confronted with this equivocal evidence, it would have come as no surprise had one or two MPC members argued for rates to remain unchanged. Dissent, however, is no longer as common as it once was.
One reason is the impact of the 2008 global financial crisis. Like most other central banks, the Bank of England pushed rates down to rock bottom and kept them there for a very long time. Committee members were left twiddling their thumbs.
Another reason is changing leadership. Under Eddie George, 12.5 per cent of committee members on average dissented at meetings. Under Mervyn King, this “dissent rate” dropped to 9.3 per cent (partly because King’s reign included the immediate post-crisis zero rate era). Mark Carney’s stewardship — beginning in July 2013 — has seen a further drop to just 7.4 per cent. Intriguingly, whereas King himself was happy to be a “dissenter” — he allowed himself to be outvoted on more than one occasion — the same has not been true of Carney: he has always been part of the majority view.
Dissent matters, however. It indicates there is some level of debate. The MPC is not supposed to be a collection of rubber-stamping automatons. The four “external members” — if not the Bank “lifers” — are required to be “independently minded and… able to exert their influence”. And, as Mr King has argued, the degree of dissent tells us something about the Committee’s conviction regarding a particular decision. A 5-4 vote in favour of a rate increase offers a very different message from, say, a 9-0 vote. While the immediate rate decision might be the same, expectations regarding future changes are likely to be very different.
So how should we think about the latest unanimous decision? Oddly, unanimity often betrays uncertainty. When economists really don’t know what’s going on, they tend to hug the consensus. Like wildebeest roaming the Serengeti, they herd. Producing a forecast radically different from the consensus has little upside and a lot of downside. If the forecast is right, it will be attributed to luck alone. If it’s wrong, the economist’s reputation, like the solitary wildebeest’s neck, is at risk of being mauled. So when it appears that economists agree with each other, it may be that they have even less idea than usual of what is going on.
On this occasion, however, it may be that something else is spooking the MPC. Sterling is tumbling, partly in response to fears of a Brexit cliff edge. The committee’s mandate suggests it should worry only about the domestic inflation rate. However, there isn’t a central banker on Earth that doesn’t fret about the external value of his or her currency. And anyone with a passing knowledge of sterling’s travails over the decades knows well that some of the UK’s most difficult economic challenges have been associated with a collapse in the value of the pound.
So it may just be that the MPC’s unanimity has nothing to do with an unlikely meeting of minds on the domestic economic outlook. Instead, given the combination of rising US interest rates — making the dollar more attractive to investors — and the Brexit cliff edge, there’s a real danger that sterling could be absolutely savaged by the lions of the foreign exchange market. On this occasion, unanimity may have an entirely different rationale. It’s called fear.
Stephen King (@kingeconomist) is HSBC’s senior economic adviser and author of Grave New World (Yale)