The Bank of England meets on Thursday with expectations running high that the MPC will announce a further large dose of quantitative easing. Even if they pass this month, which seems possible, this is likely to be only a temporary postponement. Whenever it comes, the next move will be another bout of “plain vanilla” QE, involving the purchase of £50-75bn of government bonds, and taking the overall Bank of England holdings to over one third of the total stock of gilts in issue.
Meanwhile, the Fed is still debating whether to increase its holdings of long dated securities, and if so whether to focus once again on government debt, or to re-open its purchases of mortgages. Any further QE would be contentious on the FOMC, but there is probably still a majority in favour.
Central bankers, unlike many others, have not lost faith in the efficacy of QE. The vast majority of them not only believe that additional asset purchases can further reduce long term bond yields at a time of zero short term interest rates, but also that this can increase real GDP growth, compared with what otherwise would have occurred. Are they right? Read more
Amid all the focus on the UK’s decision to use its veto, it is important not to miss the main economic outcome of the summit, which is that the agreement heralds a new era in European policymaking. The German approach to fiscal policy will now be writ large across the eurozone. This raises three key questions:
- How different will this prove to be in practice from the old status quo?
- Is it a good idea from an economic point of view?
- Does it allow the European Central Bank in future to play the same role in the eurozone as the Federal Reserve and the Bank of England have been playing in the US and the UK?
My initial take on the deal is that it will be sufficient to dampen the acute phase of the crisis, but that the absence of a clear long-term strategy for growth means that there could still be a long period of chronic problems ahead. Read more
An overseas friend asked me last week: “How is the guinea pig doing?” He meant the UK economy, which has embarked on an extreme version of the tight fiscal/easy monetary mix which all other developed economies are trying in varying doses. The answer I gave him was that Plan A was severely fraying around the edges, but that it just about remained intact.
That has become clearer with the decision by the Bank of England to re-launch QE in much larger size than anyone expected. While this is consistent with Plan A, there do seem to be differences between the Treasury and the Bank over the nature of the quantitative easing which the Bank is pursuing. These revolve around the question of whether unconventional QE should now be on the agenda. Read more
How much government debt is too much government debt? That question is pertinent in most economies today, but is especially pertinent in the US, where Congress is debating whether to raise the government debt ceiling, and if so on what terms. Unless economists can give sensible advice on the appropriate maximum level for public debt, much of the debate on budgetary policy is based on little more than political bias or, even worse, gut feeling dressed up as expert opinion. Read more
The Bank of England’s latest Inflation Report was certainly a downbeat document. Mervyn King, Bank governor, said there are “difficult times ahead”, because the economy is still undergoing a slow adjustment to the impact of the financial crisis. By reducing its GDP growth forecasts while simultaneously increasing its inflation projections, the Bank has signalled that it believes the UK is now facing a series of supply side problems – and those are always the most difficult for any central bank to handle. Read more
The past week has seen the publication of disappointing Q1 GDP data for both the US and the UK. On the surface, this seems worrying, since these two economies have always been the most vulnerable to double dip recessions, because of their exposure to housing and their bloated financial sectors. In both economies, the slowing GDP figures have led to calls for further fiscal or monetary stimulus. However, the official GDP statistics are probably exaggerating the extent to which the economies have in fact slowed down since the beginning of 2011. Read more
So what did the Chancellor actually do today to change macro-economic strategy in the UK Budget? Read more
Gavyn Davies is guest editing FT Alphaville today. Follow his posts. Read more
Britain’s Chancellor George Osborne has embarked on an audacious shift in the mix of fiscal and monetary policy. But despite unexpectedly high inflation figures on Tuesday, and ongoing worries about growth, the current combination of tight fiscal and easy monetary policy remains the best chance of avoiding a sovereign debt crisis while ensuring acceptable increases in gross domestic product. Read more
Gavyn Davies will guest edit FT Alphaville on Wednesday, UK Budget day. Join him there for rolling coverage of the day’s news. Read more
The UK GDP data for 2010 Q4 were so bad, and they are potentially so important as a signal for other countries which are about to embark on fiscal tightening, that they are worth another look. Read more
The UK GDP figures for Q4 2010 have been eagerly awaited far beyond Britain’s shores, because the country is currently being seen as a laboratory experiment in what might happen when the rest of the world tightens fiscal policy. Read more
The UK consumer price figures for December have certainly thrown the cat among the pidgeons. Repeating a pattern which has now been seen for many months, the figures were not just bad, they were also worse than the markets or the Bank of England expected. In a reversal of the normal order of things, there are suggestions that the government might now see a political case for higher interest rates, while the monetary policy committee still prefers to keep rates at close to zero. Whichever way you look at it, this is a tricky moment for the Bank, but it is probably doing the right thing. Read more
David Cameron took a gamble yesterday with his promise that the UK will in future publish official statistics for national well being. Read more
For most of my life in macroeconomics, I have tended to be very dismissive of anecdotes from the world of business. They run the risk of exaggerating the importance of specific experiences in a small number of companies, and behavioural finance warns us that human beings tend to over-estimate the significance of events which happen directly to them, rather than to others. Read more
From now on, GDP figures in the UK will be watched with more than usual interest, because Britain is embarking upon the most significant fiscal tightening among the G7 nations. Can the economy withstand it?
Today’s GDP statistics for the third quarter, which show that the economy is growing at an annualised rate of 3.2 per cent, were much stronger than expected, and suggest that the economy is in better shape than many economists had predicted as the government is launching its fiscal retrenchment. However, the composition of the data is somewhat less encouraging than the picture painted by the headline figures. Read more
The public spending plans published by the UK government yesterday promise the most austere path for departmental spending on public services since the 1975-1980 period. And allowing for the cuts planned in welfare benefits, the overall settlement for total public spending is the most draconian since 1945. Read more
Mervyn King’s speech to the TUC this week reiterated his strong support for the fiscal retrenchment plan announced by the coalition government in the UK. Some people have said that it is not the role of the central bank Governor to comment on fiscal policy, which they argue should be confined to the political arena. However, the Fed Chairman and the President of the ECB frequently comment on government debt and budget deficits, so it is hard to see why Mr King should be criticised for expressing his opinion. A much more important question is what his speech tells us about the likely course of fiscal policy and its relationship with monetary policy. Read more
The shift in market prices since the Fed meeting on Tuesday has been very minor in the great scheme of things, but it has obviously got some people worried that it is the start of a much bigger move in the coming weeks. Read more