UK monetary policy and Cricket…Switching gears from frontfoot to backfoot..

Andy Haldane reviews economic conditions in UK and change of mon pol stance. Using analogy from cricket, he had earlier said that in the batting (economic) corridor of uncertainty it is better to be on frontfoot:

It is not difficult to see why this choice over timing is a difficult one. The policymaker in this situation faces the self-same dilemma as the batsmen facing a ball pitching in the corridor of uncertainty. In that situation, the coaching manual no longer offers a clear guide. Two strategies are equally justifiable.

The first is to stay on the back foot and play late. This has the advantage of giving the batsmen more time to get a read on the trajectory of the ball as it swings and darts around. It avoids the risk of lurching forward and then needing hurriedly to reverse course if the first movement is misjudged. This is the way, Joe Root, the Yorkshire and England batsmen, plays his cricket. If he were on the MPC, he’d be called a dove.

But this strategy is not riskless. Playing late relies on having an uncannily good eye and strong nerve. It runs the risk of having to react fast and furiously to avoid missing the ball entirely. An earlier front foot movement would avoid that risk, allowing a more gradual movement forward. This is the way Ian Bell, the Warwickshire and England batsman, plays his cricket. If he were on the MPC, he’d be called a hawk.

So which is the better strategy? Benjamin Disraeli told us there are lies, damned lies and statistics. Here my analogy between cricket and the economy breaks down. Economic statistics, as we know, do sometimes lie. Cricket statistics, typically, do not. They tell us that Joe Root averages 43 in test matches to Ian Bell’s 45. In other words, it is a close run thing with the odds at present slightly favouring the front foot. But a good run of scores from either player could easily tilt the balance. That, in a nutshell, is where the MPC finds itself today.

In this new speech he again draws from cricket (though the cricket season is over in England). Economic situation has changed in UK since his previous speech.

Back in June, with the cricket season in full swing, my views on the appropriate stance for UK monetary  policy were evenly-weighted between the front foot (moving rates sooner) and the back foot (moving them later). With the sun shining, meteorologically and economically, the evidence leaned slightly towards a front foot stance (Haldane (2014)).

Underpinning that judgement was the UK’s increasingly well-established and broadly-based economic recovery. Moving in a timely fashion to normalise rates helped avoid the risk of a hastier reaction later. In other words, it supported a limited and gradual subsequent path for interest rate rises.

Three months on, with temperatures falling and the football season in full swing, how do economic prospects now look? Has the financial weather changed? How have the economic batting averages evolved? And how has the appropriate monetary stance, back or front foot, been affected?

He shows on a short term basis, there is recovery but if we take a long term view economic recovery is still weak. He shows an index called agony index which is still very low ..

So which shall play out:

So which of these twin forces is likely to win out? This is an issue on which a global debate is currently raging. For some, the world is experiencing a fairly conventional recovery – perhaps slower and lower than usual, but with normal service resuming. For others, the world is instead facing a more protracted period of sub-par growth – an era of “secular stagnation” (Summers (2014)).

The MPC’s central view, as contained in its August Inflation Report, is a mix of the two views, but with a stronger flavour of the first. It envisages a slower and lower recovery than in the past, but which builds in momentum over time. For example, according to the Inflation Report projections, productivity and real wage growth are expected to enter positive territory during the first half of next year and real interest rates by 2016 (Chart 6).

So what are his views? Interestingly, the backfoot player has a better average than the frontfoot player in the recent cricket season. Accordingly, Haldane prefers Root’s batting over Bell’s:

Three months on, it is time to update the batting averages. Ian Bell’s batting average has remained at 45 –the front foot recovery has remained on track. But over the same period, Joe Root’s has risen to 51. Cricket statisticians and financial markets are agreed. While still a close run thing, the statistics now appear to avour the back foot.

On balance, my judgement on the macro-economy has shifted the same way. I have tended to view the economy through a bi-modal lens. And recent evidence, in the UK and globally, has shifted my probability distribution towards the lower tail. Put in rather plainer English, I am gloomier.

That reflects the mark-down in global growth, heightened geo-political and financial risks and the weak pipeline of inflationary pressures from wages internally and commodity prices externally. Taken together, this implies interest rates could remain lower for longer, certainly than I had expected three months ago, without endangering the inflation target.

Interesting as always..

What about comparing central banking to cricket in latter’s madhouse — India? Perhaps it has been following  Kohli/Sehwag’s approach of front foot batting trying to tackle inflation. As both Kohli’s form and inflation have dipped (Kohli’s batting looked really ugly in England where as decline in inflation is just a number game), will a more Dravid/Rahane kind of approach (slow and steady minus all the hype and still be very effective) be taken?

Infact given the hype over central banking actions in general, a more sedate approach is clearly the need of the hour..

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