1. Wednesday’s inflation report press conference has been billed as a massive day for the MPC, in particular the new governor Mark Carney. Why?
The Bank of England is set to unveil a framework for what is known in central bank parlance as forward guidance. That involves telling markets -and the public – that central bank cash will remain ultra-cheap until the economy returns to rude health.
It would be one of the most substantial changes to the UK’s monetary policy framework since the rate-setting Monetary Policy Committee became independent in 1997.
It is also Carney’s big idea to lift the UK economy out of the doldrums and into what he has termed “escape velocity”. Others interpret this as a self-sustaining recovery.
However, while Carney is a fan of guidance, the rest of the MPC might take some convincing. Four of its current members, including deputy governor Charlie Bean and chief economist Spencer Dale, have spoken out against forward guidance in the past.
One of the few occasions when I’ve used a ruler since leaving school is during the Bank of England’s inflation report press conferences. I’m not alone — for years a ruler has been an essential tool for those trying to fathom what monetary policy makers thought was going to happen to growth and inflation in the months and years ahead.
The BoE’s practice of waiting a week between releasing its quarterly fan charts for growth and inflation and the data underlying them left bank-watchers with little choice but to dig out the ruler to work out where the MPC thought growth would be in, say, 2014. As Chris Giles commented here, there were several problems with this approach.
Now, thanks to the Stockton Review, reporters need no longer remember their rulers (hat tip to George Buckley at Deutsche Bank for the headline of this post).
If you read today’s Bank of England inflation report, you will notice some welcome changes. More will follow on this blog about the improvements in BoE transparency. In the meantime, the five things you need to know about the bank’s economic outlook are:
On the day of the inflation report, the Bank of England came out with its most pessimistic medium-term outlook for the economy, suggesting weak growth would not cause inflation to fall below the 2 per cent target. That suggests no room for more quantitative easing. But is that really the case?
How loose is monetary policy? How big is the QE programme? These were all questions that popped up again and again at Bank governor Sir Mervyn King’s press conference this morning in light of the Treasury’s temporary raid on the accumulated surplus of the QE pot. Here is a timeline of what we know and Sir Mervyn’s answers today.
Mervyn King. Image by Bloomberg.
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12.12 The live blog is now closed.
- The MPC’s fan charts now show inflation more-or-less on target over the forecast period, and the risks to inflation are now judged to be broadly balanced. This would suggest that there will be no more QE in May. However, the MPC has also left itself some wriggle room, as inflation is still shown to be a little below target over the next couple of years. The governor also said inflation was “more likely to be below the target than above it for a good part of the three-year forecast period”.
- The UK economy is still set to recover gradually, though the numbers may “zig zag” over the course of this year as a result of the Queen’s diamond jubilee.
- Charlie Bean appeared confident that productivity levels would recover (see 11.25). And the governor was also surprisingly forthcoming in acknowledging that there may be flaws in the inflation targeting framework (see 11.36 and 10.53).
11.39 The press conference ends. In response to the final question, the governor says the 25 per cent fall in the real exchange rate is here to stay. Otherwise wage costs would have risen as a result of sterling’s depreciation.
Investors’ attention will be fixed on Threadneedle Street tomorrow morning, when the Bank of England releases its latest forecasts for inflation and signals whether markets should expect more quantitative easing in May.
Sir Mervyn King’s latest missive to the chancellor, out today, seeks to explain why inflation remains significantly above target. Will it offer any clues about future QE?
Though it’s not worth reading too much into the letter the governor’s words do offer some support to the view that the asset purchases announced earlier this month will be the last.
An hour or so ago, Mervyn King recognised that the Bank of England’s communication of its forecasts could be improved. This is a big step forward for transparency and the Bank of England governor deserves to be heartily congratulated.
He had been digging himself deeper into a hole defending the existing fan charts, but in a lecture to the Royal Society today, he stopped digging. This shows courage and intellectual honesty that is rare among the heads of powerful institutions such as central banks.
As readers of this blog will know, I have been extremely critical of the Bank’s fan charts, particularly the published forecast in February which failed to convey the message the MPC wanted, and critical of the governor for refusing to acknowledge their weaknesses. I suggested alternative presentations, to meet both my needs as someone in the business of wholesale information dissemination and to meet the Bank’s needs of conveying uncertainty in its forecasting. The Bank is thinking along the same lines as I suggested.
Let’s look at what is being proposed.
The Bank of England expects a coming boom. At least that is what is implied by its economic forecasts, writes Chris Giles of the Financial Times, who has translated the charts into figures. It is much more optimistic than the Treasury and independent forecasters, signifying that the recession is over and the recovery will be better than we had feared.