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
The recent battle of words on the MPC translated into a 1-7-1 vote at the October meeting with Adam Posen voting to increase quantitative easing by £50bn over an unspecified period and Andrew Sentance continuing to vote for a rise in interest rates to 0.75 per cent.
Between these two now entrenched positions, the rest sit in no-man’s-land, unsure whether the risk that high inflation will dislodge expectations is greater than the risk that significant spare capacity will bring medium-term inflation sharply lower.
The bias of this mushy middle was slightly dovish:
“Some of those members felt the likelihood that further monetary stimulus would become necessary in order to meet the inflation target in the medium term had increased in recent months. But, for them, the evidence was not sufficiently compelling to imply that such a course of action was necessary at present.”
What will be fascinating is Read more
Martin Weale, the new boy on the Monetary Policy Committee, has just finished giving evidence to the Treasury Select Committee on his recent appointment. He was safe and boring. Bank of England officials appeared delighted with his performance.
Mr Weale said he was neither a hawk nor dove, but this was in the eye of the beholder. The austerity Budget did not have a major impact on the outlook. Monetary policy should be the first line of defence against a further weakening. In such circumstances it would be appropriate for the MPC to look at ways it could stimulate the economy further, such as more quantitative easing and some stuff on the boundary of monetary and fiscal policy. Read more
A crunch meeting of the monetary policy committee on Wednesday will reveal the Bank of England’s verdict on the new coalition government and the emergency Budget.
Will the MPC judge the proposed spending cuts so damaging to recovery that it has to crank up the printing presses again and inject more money into the economy? Is the global and UK recovery so strong that the Bank can head for the exit and relinquish its extraordinarily loose monetary policy? Or will the MPC be so paralysed by uncertainty over the future that it will again do nothing? Read more
There were some very good presentations at the Monetary Policy Forum, organised by Fathom Consulting this morning, all of which highlighted what a difficult job the Bank of England’s Monetary Policy Committee has at the moment. Cogent arguments can be made both for loosening and tightening monetary policy.
Charles Goodhart, former Bank chief economist, MPC member and general guru, said that were he on the MPC now, he would wish he could do a Rip Van Winkle, go to sleep until 2012, and wake up once some of the uncertainty over the recovery is removed. Why? “Because the next year and a bit will be fairly horrific”.
The reason things look so difficult for monetary policy is that the outlook for the inflation-growth trade-off has worsened. When Fathom plug the latest data through their replica of the Bank of England’s main economic model they first find that the Bank seems to be seriously over-optimistic on growth as their chart shows.
Now, neither Fathom nor anyone else can accurately replicate the MPC forecasts because the published versions rest on judgments by the Committee members as much as the model’s outputs. But the argument put forward Read more
The minutes of the July Monetary Policy Committee meeting, just published, show rate setters at the Bank of England have no view about the Budget’s likely effect on the economy and hence inflation. A 7 to 1 vote to do nothing arose from their inability to form a view arises partly because they are unsure about about the private sector’s response to fiscal tightening and partly because they are unsure about the effect of additional spare capacity on inflation.
The MPC needed more time to analyse the additional fiscal tightening, members complained, bizarrely adding that the effect would depend on the October spending review, even though everyone knows that this review will not change the fiscal stance, but just distribute the pain. Even more bizarrely, they then said they would revisit the issue in the August meeting, when they would, by definition, have no new news on the spending review.
“A key determinant of the medium-term outlook for activity would be the response of private sector spending to news in the Budget and the prospective Spending Review. That would depend in large part upon the extent to which the sharp rise already seen in private sector saving had reflected anticipation of the impact of the fiscal consolidation on future post-tax income. Further evaluation of the impact of the Budget on the outlook for private sector saving would be required as the Committee prepared its projections and analysis for the August policy meeting and Inflation Report. “
In conclusion, the MPC said that an analysis of the Budget was really just too difficult: Read more
With all the furore over the OBR’s tweaked Budget forecasts, scrutiny of the Bank of England’s fallible forecasts has been more limited than usual. So David (Danny) Blanchflower, former Monetary Policy Committee member and scourge of Mervyn King, Bank governor, has just tried to redress the balance.
Writing for Bloomberg Businessweek today, he says, “it is time to reveal a dirty little insider’s secret”.
“During my time on the Bank of England’s Monetary Policy Committee, which makes quarterly economic prognoses, Governor Mervyn King controlled the hiring and firing of the forecast team, who did his bidding. They had to produce a result that was consistent with King’s views, or else they would be history. A patchwork of arbitrary fixes and prejudices frequently drive forecasts, which for the uninitiated are hard to see.
The Treasury expects a short vacancy on the monetary policy committee following the announcement that Kate Barker is to step down at the end of her term on May 31. Ms Barker is serving her third term on the nine-member rate-setting committee, having started June 1, 2001.
Her voting pattern over the past year and a half shows she has tended to vote in line with the majority – and with the final vote. Any speculation as to her likely replacement, and where they are on the hawk/dove spectrum?
Chris Giles of the Financial Times asks, if the Bank of England’s policies are so successful, why does it say the recovery be slow and why might there be a need to shovel even more newly created money out of the Bank’s door into the economy? Read more
If the Bank of England decides to reduce the rate of interest it pays on reserves deposited by commercial banks, it’s not yet clear whether the MPC or executive will make the call. Chris Giles of the Financial Times has learnt that the Bank is still asking the question itself. Read more
Former Monetary Policy Committee member David Blanchflower opens the lid on the secretive Bank of England. Some great lines, which will make Mervyn King, Bank governor, choke on his cornflakes – but lots of self-justification, writes Chris Giles Read more