Talk about rationalisation after the fact. The one thing consistent about the Bank of England’s communications over QE has been its inconsistency. Officials always insist the policy has worked, but have repeatedly changed their stated intermediate objectives for QE and how they were judging its success. The Bank’s communication around QE has been a classic example of “policy-based evidence-making”. Gordon Brown, the master of the dark art, would approve.
Today, as the Monetary Policy Committee has just announced a pause in the creation of money and purchases of assets, it has said almost nothing about QE, except that £200bn was the “appropriate” amount to “to keep inflation on track to meet the 2 per cent inflation target over the medium term”. QE and low interest rates would, in any case, “continue to impart a substantial monetary stimulus to the economy for some time to come,” the MPC continued.
I am deeply indebted to Jessica Winch, who analysed all Bank communications over the past year for the Financial Times. She has compiled the following evidence on the QE and the Bank.
This first chart compiles the intermediate objectives for QE that the MPC has declared are important in 2009 with colour coding to represent the proportion of the total times in a month a particular objective was aired. Red means that objective was not mentioned in the month and the proportion of mentions rises through orange, yellow and lime until bright green represents a reason that was used more than 30 per cent of times in a particular month.
Without getting bogged down with the precise figures – there was a dearth of statements for example in September and December so those months have been excluded – it is obvious the Bank has flipped and flopped over the intermediate objectives for QE last year. It was all about expanding the money supply and the price of corporate bonds until it wasn’t; it had little to do with lowering gilt yields and then that is what the public should focus on, officials said. In the late Spring, there was a period when the exchange rate, improved confidence and bank lending were important, but then these reasons fell out of fashion among the MPC.
What about the reasons why QE was working? Flipperty-flop again.
“Too early to tell” was in vogue last Spring and then again in December. Lowering gilt yields was initially popular as a criteria of success, until they rose, then it was lowering gilt yields relative to the expected future policy rate (the OIS spread), and then that reason was downplayed as yields rose. Rising money supply became very popular as a reason QE was working as M4 seemed to be rising last summer, but then fell away with the figures in the Autumn and as asset prices - particularly equities rose – this became the criteria for QE’s success. Along, of course, with the new and untestable mantra that the economic outcome has been better than it otherwise would have been.
Of course, we cannot know how well QE has worked. But this inconsistency shown in these hardly inspired confidence in the Bank and the MPC.
