Andy Haldane, the Bank of England’s executive director for financial stability, is considered one of the most original thinkers in any central bank.
Mr Haldane, to his credit, not only picks holes in existing practices, but also suggests possible fixes.
His call for regulators to lower capital and liquidity buffers has, however, largely fallen on deaf ears, with the majority of the interim Financial Policy Committee against it. But another of his ideas appears to be more popular.
The Bank of England’s Financial Policy Committee statement, out today, has left a lot of people scratching their heads.
The first of two recommendations calls on banks to “take any opportunity they had to strengthen their levels of capital and liquidity so as to increase their capacity to absorb flexibly any future shocks, without constraining lending to the wider economy”. The second warns that “some actions taken to raise capital or liquidity ratios could potentially worsen the feedback loop between the financial sector and the wider economy, and so should be avoided”.
At first glance, the recommendations appear contradictory. They are not. But they are conflicting.
The minutes of the September Monetary Policy Committee meeting make QE2 a matter of when, not if.
However, as FT Alphaville’s Neil Hume writes, the MPC also discussed three other options. From the minutes:
The Committee also discussed a range of other possible policy options including: changing the maturity of the portfolio of assets held in the Asset Purchase Facility; revisiting the earlier decision not to lower Bank Rate below 0.5%; and providing explicit guidance about the likely future path of Bank Rate beyond the information about the Committee’s judgement of the medium-term outlook for inflation contained in the Inflation Report and the MPC minutes. At the current juncture, none of these options appeared to be preferable to a policy of further asset purchases should further policy loosening be required.
How likely is each of the three?
The appointment of Alistair Clark to the interim Financial Policy Committee raised a few eyebrows among the Treasury Committee.
It was not because they thought he lacked experience. Rather, it was that Mr Clark, who worked at the Bank of England for 36 years and was seen as one of the governor’s closest advisers during the crisis, was named one of four “external” members.
The committee, already concerned that there are too few external voices on the FPC, indicated that it was none too keen on an “insider” such Clark being appointed as one of the externals once the interim body becomes statutory.