The Bank of England’s minutes of the March Monetary Policy Committee meeting were mildly hawkish this morning.
Mildly because the Committee reiterated its view that:
“Committee members continued to expect that a significant margin of spare capacity in the economy was likely to bear down on inflation, once the temporary impact of shocks to the price level had worn off.”
Hawkish because some members of the Committee thought the balance of risks to inflation had increased in March from February:
“Some members considered that the upside risks to inflation had increased slightly over the month; others felt that the balance of risks had not changed materially.”
There is no point trying to work out how many “some” was, since all of the MPC voted to leave policy unchanged.
There has to be a suspicion, however, that the Bank is playing expectations games again. Its February inflation report was considered very dovish because of the charts it published and then subsequently disowned; now the March minutes are a bit more hawkish than expected. That is impossible to tell.
What is certain, however, is the Committee is still infatuated by policy-based evidence making. Check out paragraph 4 – it is a classic.
“4. Yields on UK government bonds had risen. Ten year ahead nominal forward rates had increased by around 30 basis points, while real forward rates had risen by rather less. Uncertainty about UK fiscal prospects could have contributed to that rise. The suspension of the MPC’s asset purchases had not had much impact on the gilt market.”
The message is clearly that this unwelcome rise in long-term forward interest rates is definitively nothing with the Bank or the pause in quantitative easing, but might well be something to do with those silly people in politics who cannot make up their minds on fiscal policy. What evidence does the MPC give for its certainty that QE is irrelevant but the finger probably should be pointed at fiscal policy. None.
From the evidence about the rather big difference in forward nominal and real rate movements, the inference might well be that market participants less confident about the MPC’s inflation fighting instincts than before February.
Equally, if you look at the Bank’s data on spot real and nominal rates, the higher yield on nominal government debt – the stuff bought by the Bank during QE – but no increase in 10-year real yields is suggestive of the market giving a lower price to the government bonds which are no longer being bought in huge quantities by the Bank. That would suggest investors act as though QE is a flow concept not a stock concept and the pause in asset purchases did have an impact on the gilt market. Oh no, that can’t be right, it would conflict with the stated policy of the MPC – (except, of course, when Committee members talked about the benefits of QE being seen in lower gilt yields).
Confused? There is no need to be. Just remember that when organisations come down with the policy-based evidence-making disease, everything gets rather tortuous.
