INTERVIEW: Gertjan Vlieghe

On the floor of Gertjan Vlieghe’s wood-panelled Bank of England office sits a small doorstop in the shape of a hedgehog – an animal not renowned for its speed. And its patient owner is certainly in no hurry to put up interest rates.

Mr Vlieghe, 46, who joined the Bank’s Monetary Policy Committee as an external member in 2015 has established himself as the most dovish member of the rate-setting committee.

Even before the Brexit referendum Mr Vlieghe was publicly fretting about the fragility of the UK economy and even floated the possibility that interests rates might need to pushed by the Bank into negative territory.

And so when the Leave side unexpectedly prevailed last June, prompting widespread fears of an imminent recession, Mr Vlieghe voted for an immediate cut in rates to 0.25 per cent. The eight other members of the Monetary Policy Committee wanted to hold their fire until they saw more data, although they joined him the next month in sending rates down to a new record low.


But now many of Mr Vlieghe’s colleagues are breaking the other way. In June, three external MPC members voted to increase rates back to 0.5 per cent, reversing last August’s cut, and creating the biggest split on the committee since 2011.

And since then, significantly, Andy Haldane, the Bank’s chief economist, has signalled that he is ready to join the hikers. If the arch-dove Mr Vlieghe were also to switch sides many financial traders would probably assume an August rate rise from Threadneedle Street was nailed on.

But not so fast. This dove is not for turning – at least not yet.  

“I haven’t really changed my mind,” he says.  “This is an environment where a premature hike would be a bigger mistake than one that turns out to be slightly late because of the asymmetry around risk.”

That risk, in Mr Vlieghe’s view, relates to the fact that rates are currently so close to zero. If the Bank raises rates and then has to reverse course because the economy falters it has much less room to cut.

“Our ability as a central bank to stimulate spending is…smaller than our ability to restrain spending,” as he put it in an unusually wide-ranging speech analysing the major structural economic forces acting on the UK economy in 2016.

Though he admits that inflation, which hit 2.9 per cent in May, is “uncomfortably high” he sees that primarily as the natural pass-through of the slump in the pound in the wake of the Brexit vote.

And he’s more concerned about the underlying weakness of the economy. Though the UK did not go into recession last summer, many see Brexit-related chickens coming home to roost now in the form of dwindling consumer confidence.

 “I think the consumption slowdown is here, it’s not over,” says Mr Vlieghe, adding that he does not see investment and exports taking over the baton and driving growth.  

“Of course if the data turns out stronger I do agree that a higher rates is warranted but my central forecast is that’s not going to happen in the near term.”


So would he be happy to vote in a minority to keep rates on hold, while the rest of his colleagues wanted to hike? Mr Vlieghe is unperturbed by the thought.  “I will do whatever my reading of the data tells me is the right thing,” he says, matter-of-factly.

One gets the impression that the intellectually self-assured Mr Vlieghe, who traded in a partnership at the hedge fund Brevan Howard to join the MPC, would rather relish the prospect of arguing his corner against the odds.

 “I spent ten years trying to forecast what central banks, including the Bank of England, were going to do next,” he says.  “Having the opportunity to actually make the decision, rather than forecast it, was for me both fascinating and an honour and a privilege. The closest thing you can compare it to is if you sit in the football commentator’s box and someone says ‘do you want to go down on the pitch for a while?’”.


Mr Vlieghe’s office neighbour at the Bank, until this month, was fellow external MPC member Kristin Forbes. She has now left the Bank and in her final speech she suggested modern central bankers’ high profiles were making them too reticent to “take away the punch bowl” by raising rates.

 “I completely disagree with that,” says Mr Vlieghe.  “All of the decisions that have been made over the last few years have related very clearly to the data. We have been in an environment where, despite record low interest rates, growth has been subdued, inflation pressures have been weak everywhere, wage pressure is still very weak – that tells you those very low interest rates were entirely appropriate. If they hadn’t been we would have seen a lot of overheating…which we just don’t see.” 

 “That period of low rates had nothing to do with reputation or political pressure or anything like that.”

For Mr Vlieghe, who was born in Belgium but now has dual UK citizenship, Brexit has personal repercussions. But he’s tight-lipped about how he feels personally about the vote, insisting his only focus as an MPC member is considering how it will impact the economy.

But how does the committee go about forecasting that given the immense political uncertainty?

“It’s very difficult to get your head around because it doesn’t matter what we think about Brexit, it matters what everyone else thinks, and the extent to which it influences their demand today,” he explains.

If firms start worrying about a cliff-edge Brexit in two years, he says, there could yet be a big damaging pullback of investment. On the other hand, if the UK seems to be heading towards a “lengthy transition deal” after 2019, effectively remaining in the single market and the customs union, things could perk up.

“That would be a very positive thing for business and investment and would therefore influence our interest rate policy,” he says.

Even hedgehogs can move rather rapidly when they want to.

This article appeared in The Independent on 3/7/17 

TRANSCRIPT

Given you voted for rate cut in July 2016 – going out on your own against the the rest of the Monetary Policy Committee – you’ve obviously got a reputation as a dove. Are you still towards that end of the spectrum?

I went back and looked at the last time I spoke on the record, which was April, and I haven’t really changed my mind since then about anything.

The point I made in April was that this is an environment where a premature hike would be a bigger mistake than one that turns out to be slightly late because of the asymmetry around risk. I thought that the consumption slowdown, which initially didn’t materialise after the referendum even though we thought it would, that it was starting to happen around the turn of the year.

I thought that it would, if anything, be more likely to deepen than improve and that I was still very cautious about the outlook for investment. One of the things that we thought would happen…was that there might be a pullback in investment. In the end there wasn’t, but some of the feedback I got from going around the country and talking to lots of companies was that it wasn’t that they weren’t worried about a potentially big change in their business environment but that it’s basically too far away and [they] can’t sit on [their] hands for that long.

But now that the deadline’s approaching, it’s less than two years, it might start to come into firms’ planning horizons, so I do think that’s a meaningful downside risk and already a headwind to investment. I haven’t really changed my mind. I think the consumption slowdown is here, it’s not over.

I don’t there’s going to be a sufficient offset from investment and net exports to compensate for that. But of course if the data turns out stronger I do agree that a higher rate is warranted but my central forecast is that’s not going to happen in the near term.

Andy Haldane said global growth is coming in stronger and that was a reason why he was shifting in favour of a rate rise…

I pay a lot of attention to what’s happening in the global economy because what’s happening in the UK tends to be well correlated and it’s important to look at that.

And it’s true that our trading partners’ growth has improved.

In the eurozone its been quite a bit stronger over the past six months than we would have expected.

But it’s also true that you can’t just literally read from that that things must be improving in the UK because you have these two very specific domestic stories – you have very weak real wage growth for households and still substantial uncertainty about the shape of the final Brexit deal and then the implementation deal and how firms are thinking about that over the next few years.

Do you dissent slightly from the Bank’s Inflation Report relatively optimistic view on investment?

I agree that the outlook is a little better than it was six months ago.

But I just don’t think it’s enough to offset what’s happening in consumption.

And one of the things I look at is investment intentions and you look at that for the manufacturing sector and that is indeed quite strong – those firms have responded to the weaker exchange rate and stronger eurozone growth.

But if you look at investment intentions for the services sector, which is much, much, bigger than the manufacturing sector, actually it remains very subdued. So if you take them together I don’t see the evidence that it’s about to take off.

How much stimulus is the Bank giving at the moment at these current rates?

It’s hard to tell. Previously I put some estimates on it, with large error bands.

I thought that a reasonable estimate for where the natural rate is, it’s about zero [per cent] in real terms. Therefore about two [per cent] in nominal terms.

So clearly with rates at 0.25 per cent there is some stimulus, but not nearly the amount of stimulus you might have expected if you were still carrying in your head a natural rate of 4 of 5 per cent, which is what people thought before the financial crisis.

You’ve spoken about asymmetric risks about raising rates. Has you view on that changed?

My view on that hasn’t changed.

What I want to emphasise is that I don’t think there is no risk from keeping rates on hold.

I just think that we are still in an environment where one of those risks is bigger than the other one.

And the risk that is still bigger is that putting rates up a little too soon in an environment where the economy is already slowing and it’ll slow further and where, it’s true, inflation is uncomfortably high, but we think most of that is exchange rate driven, that’s ultimately temporary.

Kristin Forbes said there was a risk that policymakers were concerned about their profiles and that might make them un-inclined to take away the punch bowl…

I completely disagree with that. All of the decisions that have been made over the last few years have related very clearly to the data.

We have been in an environment where, despite record low interest rates, growth has been subdued, inflation pressures have been weak everywhere, wage pressure is still very weak – that tells you those very low interest rates were entirely appropriate.

If they hadn’t been we would have seen a lot of overheating, built up pressure, which we just don’t see. That period of low rates had nothing to do with reputation or political pressure or anything like that.

The MPC is more split than its been since 2011. Are you willing to stand out as you did last July in voting against the majority?

I will do whatever my reading of the data tells me is the right thing.

In way it’s not surprising that there’s more dispersion of views on the MPC now than there was a while ago.

Because if you look at all the news we had it is kind of pulling in different directions in monetary policy terms. I mentioned weakening of growth, but activity surveys are still OK and the unemployment rate is very low. Inflation is well above target, but wage inflation is still very subdued.

Depending which of all these things you put more weight on you could easily pull in direction of wanting rates up sooner or wanting to wait longer. It’s only natural that people put different weights on and come to a different conclusion.

Do MPC meetings become fraught at these inflection points?

I haven’t found that. For the last few years I’ve sat next to Kristin Forbes – we share that internal door over there.

She knows I have a very different view of the economy from her.

But we respect each others’ views and we talk about it all the time. I lay out my case and she lays out her case and in the end we agree to disagree. It doesn’t at all damage the committee dynamic. It doesn’t become personal. I think it’s just a healthy economic debate.

Do you think you’ll leave the MPC after only three years like Kristin Forbes?

I haven’t given it any thought. I’m not even two years in.

You come from a hedge fund, Brevan Howard. What made you want to join the MPC?

I spent ten years trying to forecast what central banks, including the Bank of England, were going to do next.

Having the opportunity to actually make the decision, rather than forecast it, was for me both fascinating and an honour and a privilege.

The closest thing you can compare it to is if you sit in the football commentator box and someone says ‘do you want to go down on the pitch for a while?’ of course that’s tremendous.

You’re a dual Belgian-UK citizen. How does Brexit affect you?

My personal views about Brexit should remain personal because it’s not appropriate as an MPC member to be talking about that.

The only thing that is the MPC’s business is what the impact is going to be on the economy and therefore on monetary policy, rather than what it does to our emotions.

Do you see yourself going back to Brevan Howard or fund management? Or might you stay in the policymaking realm?

I could go either way.

I really enjoyed my time in the financial sector and I don’t rule out going back there. But I’m also really enjoying policymaking.

Are you confident about the amount of slack in the economy? Or is there a case for running the economy hot to see if we can get back on the pre-crisis trend growth?

I think the extent to which I take factors like that into account is that I’m extremely open-minded about what the amount of slack in the economy might be.

And rather than say “I know” or “it’s closely linked to the natural rate of unemployment and I know what that is” (which I don’t at all) I say I want to see evidence in the data that tells me whether we have used up slack or not.

That’s one of the reasons why me and other members on the committee pay so much attention to wages.

Wage growth is not the target per se, but we think it tells us about how much slack there is in the economy.

And so far the indication just based on wage growth is that there still is slack, despite the fact that the unemployment rate is at record lows.

So I’m trying very hard not to make that mistake of assuming there is no more slack because of certain historical relationships because I’m very well aware that those relationships change and may have changed in quite a material way.

You gave a speech about debt, deleveraging and income inequality as big structural drags and that policymakers should take more account of them…

What I was trying to lay out was a framework for thinking about what actually drives [the natural interest rate]. Because it’s one thing to say it’s probably a bit lower than before the crisis, but that doesn’t tell you what’s going to happen in five, ten, 15 years.

Is it just a crisis effect like a Reinhart/Rogoff deleveraging thing and after five or ten years after deleveraging is over you go back to normal?

There are other factors as well. It is possible that the deleveraging part of the story is coming to an end, but this demographic and income distribution affect is very big too and that doesn’t look to be coming to an end for perhaps a long time.

Do you still think that inequality is a break on monetary policy?

There is quite a bit of research that’s been done on that just in the past few years and it seems that everyone who looks into it finds that it’s potentially a very large effect. People at different points in the income distribution respond very differently to income and interest rate shocks.

So it’s not surprising that if over a long sweep of time you change the nature of the income distribution that changes the way the economy responds to interest rates. This had very little to do with the crisis – changes in the income distribution took place well before that. Income inequality was low in the 70s and went up and stayed there.

One of the things people do when they estimate the natural rate is they look at historical averages. My point is you have to be very careful which bits of history you use because if things like the amount of debt and the income distribution are very different then the [natural rate of interest] is likely to be very different.

The Bank’s main forecasting model uses a representative agent – is that something you’d like to see reformed?

The Bank is doing a lot of work on that, specifically using demographics and on deleveraging and trying to get some estimates.

What we’re not doing is having one gigantic model that has all these things in it. That’s not really a reasonable request. We have a model [Compass] that has some equilibrium values in it – the unemployment rate, real interest rates.

We can move them for reasons that are based on analysis outside the model.

It’s exactly what we did to the natural rate of unemployment – we lowered it. Our model itself doesn’t tell us anything about where it should be. It’s just something you put it. We changed the parameter in the model.

On Brexit, do you in the MPC discuss possible scenarios?

We discuss what are the possible mechanisms by which it could affect the economy.

We discuss where one would one look for evidence on whether it’s happening or not. But it’s very difficult because in the end what really matters for the country is the long-run economic impact of Brexit.

That’s mostly a supply side thing. It’ll turn out to be very important over the next few decades. But it’s not really important for what happens for monetary policy right now. What matters right now is whether people’s expectations of that long-run supply effect has an impact on demand [today].

It’s very difficult to get you head around because it doesn’t matter what we think about Brexit, it matters what everyone else thinks, and the extent to which it influences their demand today. That’s what we’re trying to gauge, just asking companies, going around, looking at what’s happening to consumer confidence, spending, housing, cars. People tell us by their actions.

So if a sense crystalises that we’re heading for a transition deal that could feedback into your monetary policy decisions?

Absolutely. Initially after the referendum we thought there were indications of a big pullback of investment.

Uncertainty spiked, activity surveys went down very sharply. In the end it didn’t happen.

One of the reasons it didn’t happen is there was a sense it was just too far away.

So now as it gets closer there is a risk they start worrying again. But if a very strong sense is established that there’s going to be a lengthy transition deal then we go back to that previous regime where [firms think] it might all change but it’s not going to change for a long time so I can just get on with my business and not worry about it.

That would be a very positive thing for business and investment and would therefore influence our interest rate policy.

Would that sense come from the Bank’s regional agents’ reports?

It’s from a whole range of things. The agents are very important. We also have this thing called the “decision makers’ panel”.

We also look at lots of other people’s surveys of investment intentions, confidence and activity.

So you don’t really use your own judgement about what sort of Brexit we are heading for?

You have to be open minded. Even if you have a view that it’s doing something to the economy but you see that nobody else thinks that you say ‘well, maybe at some point they’ll come round to my view, but maybe I’m wrong’. You can’t keep that gap for very long.

So I’m trying to understand what everyone else thinks about it rather than to come to some really strong conclusion myself.

It’s incredibly uncertain, these negotiations fluctuate all the time. There are so many variables that come into play. I’m really focusing on what everyone else thinks.

People are allowed to change their mind. I just need to respond to how they’re behaving at the time.

In the immediate aftermath of the referendum spending was much stronger than we thought. More recently it’s pretty clear the economy is slowing and the response has begun and I want to see how that plays out.

There continues to be a risk that as we get closer to the deadline, unless there is really good news about a long implementation period, that you see further weakening [in business investment].

Could there be a further cut in rates, as you once mooted?

At this point the range of possibilities I’m considering is that we stay on hold longer or that we start removing some stimulus. If something much more material happens to the outlook then we have some room for stimulus.

There isn’t much room to cut. I’ve talked about negative interest rates as a hypothetical thing.

What’s important is that you’ve got to look at whether it’s appropriate for the financial system of a particular country.

For the UK we’ve discussed this at length on the MPC and we’ve concluded that for the UK it’s not a good idea and that you’re more likely to damage. If we need to we can do a lot more on asset purchases.

How alarmed are you by the savings ratio hitting a record low?

It’s the mirror image of the fact that consumption was so much more resilient than we thought.

We didn’t think that people would dip into their savings to the extent they did. We though there would be an earlier response to the income changes.

Of course if people keep spending while real income is going down…it’s certainly not something that I’d want to see continuing – neither the fall in the savings rate not the acceleration in credit growth that we saw in the second half of the year.

That’s not a sustainable basis for a recovery. If anything if that persists that’s one of the indictors that tell you maybe interest rates are too low because we don’t want to push that hard. But actually now, it is starting to come round – mortgage credit growth has gone to below 4 per cent, consumer credit growth has gone from 11 per cent to 10 per cent. It is slowing a little bit. I would be concerned if we saw it re-accelerating.

What about the flipside that indebted households are fragile to a rate rise?

That’s a very important consideration but for most of the last six years we’ve been in an environment where household balance sheets have been repaired.

We’ve seen deleveraging. Relative to income the debt burdens have come down – not because people have reduced debt but because income growth has been strong.

That’s a very healthy development. You see that in the average and also in the tail, the households that are in the part of the distribution that has the highest debt. There are fewer households now than four or five years ago that are so vulnerable. We wanted that to happen.

Last year that process of repair came to an end and looked like it was maybe starting to re-leverage which would not be a welcome development.

But it’s very early days.

People get confused because they see reports about debt levels in billions or in trillions but actually matters is the debt burden – how high is the debt relative to your income.

Are you worried about the current account deficit?

I would expect that to change. When you have a close to 20 per cent depreciation you would expect that to change from the net trade side but also from the income side.

Our trade deficit is not that large – it’s only in the order of 1 to 2 per cent of GDP. The rest is the income deficit.

There’s a lot of talk of fiscal policy being loosened…

Right now you hear lots of debate.

We’ll wait for the Chancellor to show us in a Budget what the numbers are.

When the numbers change that does change the outlook for the economy and interest rates as well.

Before you joined the Bank what was your view on monetary and fiscal policymaking in 2010-2015.

It was necessary to have a long term plan to reduce the deficit.

But it was also important for us forecasters to realise that it was going to have an affect on growth.

It reinforced our view that it was going to be a fairly subdued recovery until that process of repair was achieved. Broadly speaking that was the right call in forecasting terms.

Were the fiscal multipliers underestimated?

It’s easy for me to say because my forecasts at the time were not published. But we were mostly at the pessimistic end of UK forecasters. It sounds like hindsight now…

Do you think the Banks’ multipliers are right now?

In the last Budget and Autumn Statement we did see quite a meaningful change in projected future spending which we took into account.

In a way the tone has already changed.

I’m probably on the side of slightly larger multipliers [than the Bank’s staff] but then I want to emphasise that I treat that very symmetrically.

[So] when we were getting news that there was going to be ongoing further austerity that would make me therefore a little more pessimistic.

But now that we are getting news that there is less austerity that conversely makes me think there is a bigger boost relative to the previous outlook.

What I’m saying is that I’m not cherry picking – I’m treating them symmetrically.

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