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
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
Ian McCafferty, who has replaced Adam Posen on the Bank of England’s Monetary Policy Committee, appeared before the House of Commons’ Treasury Select Committee this morning.
The hearing provided some interesting insights on McCafferty’s opinions on fiscal, as well as monetary, policy. Read more
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? Read more
Adam Posen’s speech today – in which he argues for more quantitative easing and new forms of QE – raises two important issues which I will cover in two posts. Here I will discuss words and deeds at the Bank of England’s Monetary Policy Committee. My second post will cover Mr Posen’s calls for more exotic forms of QE.
A big problem the MPC is causing for those seeking to understand UK monetary policy is that confusion reigns about what it would take to trigger QE2 in Britain. And as so often recently, this is because the Bank of England appears to find evidence to justify policy decisions rather than allow evidence to guide policy. Read more
Current policy rate: 0.5 per cent
Consensus expectation: no change
Inflation target: 2 per cent “at all times”
CPI inflation rate: 3.3 per cent in November
Notable special measures in operation
- Quantitative easing of £200bn, under which money was created to buy government bonds between March 2009 and February 2010
- Other liquidity support to the banking sector – notably the Special Liquidity Scheme – not directly relevant for monetary policy and due to expire in early 2012
Points to watch Read more
For those following the UK’s economic recovery, there is little to cheer in today’s closely-watched indicator of the services sector. For the Bank of England, there is every reason to be pleased.
The CIPS services purchasing managers’ index fell sharply from 53 in November to 49.7 in December, a level associated with stagnation or contraction in the sector. New business was down too, as was employment. Since surveys do not intrinsically matter, the reason to worry about the CIPS survey is that it has a better record than most at foreshadowing the actual output of the private services sector – the area of the UK economy which needs to grow reasonably strongly if the recovery is going to be robust.
As the chart shows, the latest reading on the official index of services also dipped in October. Put the two together and the fourth quarter of the year starts to look rather weak.
Why is this excellent news for a Bank of England? Read more
Apologies for the terrible pun. The point is that Charlie Bean’s speech today could have been delivered in mid 2008. If fact, the Bank’s deputy governor did deliver a very similar speech in April 2008. Mostly, Mr Bean is optimistic:
“As 2010 draws to a close, the good news, then, is that the recovery, here and more widely, has remained on track, following the sharpest downturn in activity since the Great Depression. Such an outcome was by no means guaranteed twelve months ago; for that we must be grateful.”
But he is also aware growth could disappoint in 2011 as the credit crunch still bites and fiscal tightening hits hard:
“In many developed countries, the after-effects of the financial crisis still linger, in the form of banks that are still overly reliant on official support, fragile household and business confidence, and bloated public sector deficits and debt.”
The trouble is that the deupty governor is also concerned about inflation overshooting the target: Read more
These are the clearly audible words spoken by Michael Fallon, member of the Treasury Select Committee, to Andrew Tyrie, the Committee chairman at the end of the evidence given by Robert Chote, new chairman of the Office for Budget Responsibility.
Why did Mr Fallon MP call for the return of the Treasury’s chief economic adviser rather than the shiny new representative of the independent OBR?
Briefly, because Mr Chote irritated the Committee by playing with a dead straight bat, avoiding questions and talking round issues. The Committee was upset that the OBR had not performed sensitivity tests on not-so-extreme scenarios such as large exchange rate fluctuations following a crisis in the eurozone and that the scenarios tested by the Office were pretty benign.
The result was much as with Martin Weale’s appointment to the Monetary Policy Committee Read more
As per Robin’s Fed post, here is a quick summary of the issues for the November Monetary Policy Committee meeting.
Current policy rate: 0.5 per cent
Current unorthodox measures: £200bn of assets (almost all gilts) purchased
Consensus expectations: No change – a position held by all but outliers
Data developments of note
STRONG initial third quarter GDP – 0.8 per cent
STRONG PMI surveys for manufacturing and services
WEAK US growth offset by STRONGER European data
Still TOO HIGH inflation, but stable with CPI inflation at 3.1 per cent
Developments on Committee thinking
The October minutes were split 1-7-1 with the swing voters on the MPC dovish, but only slightly. Those in no man’s land wanted to see more evidence from data Read more