There are many uses of the phrase “new normal” in economics these days. Usually, it is used to signify lower growth or a different type of growth than in the pre-crisis period. Mark Carney went onto the radio this morning to talk about the “new normal” in monetary policy.
Interest rates would be materially lower in future than the 5 per cent rate widely seen as normal before the crisis. The Bank of England governor’s words have been widely reported as a big new statement of policy.
Is this a new policy?
No. Carney first talked about future interest rates being “well below historical norms” in his January speech at the World Economic Forum in Davos, which confirmed the BoE had ditched its original forward guidance linking interest rates solely to unemployment. The important passage was reported clearly in the FT at the time and is copied below. Read more >>
In a talk delivered on 3 January, which the ever-so-slightly disorganised Andy Haldane has just got round to writing up, the Bank of England’s head of financial stability beautifully sets out the new central bank orthodoxy on the benefits of macro-prudential policy.
First, he clearly defines the term:
“In a nutshell, it means that policymakers have begun using prudential means to meet macro-economic ends.”
Next, he looks back at the crisis and asks the correct question: what would have been different had macro-prudential policy been fashionable (it was invented) rather than deeply unfashionable in central banking circles. Read more >>
Future BoE governor Mark Carney. Getty Images
Bank of England governor-designate Mark Carney talked a lot today about his fondness for so-called “forward guidance” — where a central bank indicates what is likely to happen to monetary policy way beyond its next policy vote.
The theory is that forward guidance boosts growth by providing more certainty to lenders that they will be able to access cheap cash from the central bank for a long time to come. Convinced of this, banks will reduce borrowing costs and lend more. And, with rates remaining lower for longer, savers will believe there is little point in holding cash and will go splurge. Read more >>
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 >>
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. Read more >>
Last Friday the FT’s economics editor Chris Giles took issue with the use of “the Niesr chart”, so-called because of its frequent publication by the National Institute of Economic and Social Research, to show what’s happening with the UK economy.
Chris argued that the Niesr chart, which shows that — in GDP terms — the current recession is the longest and the deepest since the 1930s, “may well be showing us irrelevant nonsense”.
Though output is now almost 4 per cent below where it was in 2008, the latest employment figures – out today – show that there are more jobs around today than before the crisis began. And this, Chris argued, meant that neither the Niesr chart nor the employment data should be used alone to illustrate what has happened to the UK economy in recent years.
External Monetary Policy Committee member Ben Broadbent has some sympathy with this view. In a speech today, Mr Broadbent argued that, because of the disparity between what the output figures and the jobs data tell us, policy makers “may be less confident than usual” about whether the origins of a change in the GDP result from a supply shock (which monetary policy can do little about) or weak demand (which monetary policy is supposed to address). Read more >>
Adam Posen’s brief flirtation with the Monetary Policy Committee majority is well and truly over.
At the MPC’s April and May votes, Mr Posen left David Miles as the only member voting for more quantitative easing.
That is unlikely to be the case at next month’s vote, however. In a speech delivered this afternoon, Mr Posen not only calls for more money printing, but also for the Bank to spend the cash on assets other than gilts – an idea that the governor and other Bank staffers have fiercely objected to on the grounds that it would hinder Threadneedle Street’s independence.
Elements of the argument are not new — Mr Posen in September called for the Bank to branch out from buying gilts and do more to spur lending to smaller businesses. Again, he is dismissive of the view that doing more impacts a central bank’s credibility.
But there are also significant differences in today’s speech from what Mr Posen had to say in the autumn. Read more >>
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More QE from the Bank?
The Bank of England‘s Monetary Policy Committee meets on Wednesday and Thursday, when the decision is due out at noon UK time (11am GMT).
Will the MPC vote for more QE? Read more >>
Commuters pass the Bank of England. Image by Getty
As expected, the Bank of England today kept interest rates on hold at 0.5% and opted not to print more money.
Analysts’ attention has long focussed on the Monetary Policy Committee’s May meeting; it was always more likely to hold off on plumping for more quantitative easing until then. However, its far from certain whether the MPC will opt for further asset purchases on 10 May.
Here are a few of the factors that are likely to sway the MPC’s decision on whether it adds its the £325bn-worth of asset purchases. Read more >>