Charles Goodhart

Claire Jones

Asked today whether the Treasury should scrap the Bank of England’s 2 per cent inflation target, former policy maker and current central banking guru Charles Goodhart said no. The target, he said, had done little to stop the Monetary Policy Committee easing rates and printing money to stave off an economic and financial meltdown.

Andrew Sentance, another ex rate-setter, agreed. “Inflation targeting hasn’t been the constriction it has been played up to be,” he said this morning.

A cynic would argue that this is because in recent years the BoE has ignored price pressures and instead focused on growth; inflation has been above 2 per cent since December 2009 — rising as high as 5.2 per cent in the autumn of 2011. Read more

Claire Jones

It is not only lenders that are calling for less stringent regulatory requirements.

The record of the Bank of England’s Financial Policy Committee meeting show its membership – made up of the same senior officials from the Bank and the Financial Services Authority that help set the regulatory agenda – was split over whether to lower capital and liquidity ratios.

This from the record:

The balance of opinion on the Committee was that it would be inappropriate in current circumstances for banks to reduce capital and liquidity ratios.

To be sure, none were siding with the banks’ view that Basel III is too tough. But some argued that reducing requirements for the time being – say from now until the economy recovers – may prop up growth by encouraging banks to lend.

This goes a lot further than the FPC’s statement, published last week, which said only that – if financial conditions worsen – it was “natural” that capital and liquidity buffers would be run down.

Unlike with the Monetary Policy Committee, we are in the dark about how individual FPC members vote. So it is impossible to tell how close, or otherwise, it was to recommending a lowering of capital and liquidity ratios.

But those reluctant to act were probably right.  Read more

Claire Jones

Fathom Consulting, which hosts its Monetary Policy Forum once a quarter, is known for its dourness on the UK’s economic prospects.

At Tuesday’s Forum, Fathom – as one might expect – did not buy the argument that the economy would have grown by a respectable 0.7 per cent in the second quarter were it not for the Japanese earthquake and a few extra bank holidays. Instead growth of 0.2 or 0.3 per cent per quarter was all that could be expected for now. Why? Because the UK economy bore “more than a passing resemblance” to Japan. Britain, now in the down-leg of a debt cycle, was in a lost decade of its own.

No surprise there. Or that one of the panellists, Sushil Wadhwani – among the more dovish of former MPC members – agreed.

More shocking was that Fathom’s view was widely shared. Both among the rest of the panel, made up of another two former MPC members Charles Goodhart and Ian Plenderleith, and the audience. As Mr Goodhart acknowledged, “the picture from Japan looks better and better as time goes on”.

With most agreeing that quantitative easing was the only policy option left, the tide of public sentiment has turned in favour of the MPC’s own Japan specialist and sole supporter of QE2 so far, Adam Posen. Read more

Retired LSE professor Charles Goodhart makes a strong case in today’s FT about the systemic risks posed by bail-in bonds and contingent capital (cocos) — debt that converts to equity when a bank is in or near crisis.

But he may be overstating the case when he argues that the Basel Committee on Banking Supervision and the Financial Stability Board have become too enamoured of these cocos and should be forcing banks to raise more equity instead.

In fact, the BCBS did exactly what Mr Goodhart would have wanted when they met last month to determine how to make the world’s largest banks, known as Global systemically important financial institutions (G-sifis), more resilient and safer.  The regulators and central bankers agreed that 25-30 institutions would have to carry extra capital — ranging from 1 to 2.5 per cent of their assets, adjusted for risk — on top of the global minimum of 7 per cent set for all banks last year. Read more