David Miles, the only one of the Monetary Policy Committee’s nine members to call for more money printing at the past two votes, has given an interesting speech today.
The speech presents the case for doing more based in part on the view that, if the MPC continues to do nothing, or — worse still — tightens policy, then this could destroy the UK economy’s productive capacity and, hence, its ability to grow at the pace seen before the financial crisis. 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
Vincent Reinhart of Morgan Stanley has a fascinating note out today which reverse engineers US forecasts from the IMF’s World Economic Outlook to answer questions about headwinds to demand, the effectiveness of unconventional Fed policy and the potential growth rate.
His chart on the effectiveness of Fed policy is particularly neat. Essentially, he plots annual long-term real interest rates against short-term real interest rates for the years from 1980 to 2007, draws a regression line, and then adds on dots for 2008 to 2011. Read more
As most suspected, the Bank of Japan did little today to step up its fight against deflation.
Bar some tinkering with its special lending facilities, the BoJ kept policy on hold with the size of its asset purchase programme remaining at Y65tn.
However, there are signs that the central bank could do some proper easing in the coming months.
The pound, along with Britain’s fiscal retrenchment, are often cited as explanations for why yields on UK government debt now hover around record lows.
Some suggest another factor is at play: financial repression.
This sinister-sounding phrase describes the situation where government policy attempts to artificially lower interest rates with the specific aim of reducing their debt burden. Given that QE has done much to lower yields on UK government debt, some have tagged the policy with the financial repression label.
Regardless of whether or not this is the case (more on which later), Fathom, a consulting group made up of former Bank economists, today expressed doubts about whether such a policy – and for that matter gilt purchases – will do much to aid the UK recovery. Read more
I agree with my colleagues at FT Alphaville that “counterfactuals are inherently tricky” but I don’t think they quite get to the heart of the case that you could mount against the new estimates of the effects of Fed stimulus programmes that Janet Yellen cited in her speech on Saturday.
Those estimates are that inflation is one percentage point higher than it would be had the Fed made no asset purchases and employment will be 3m higher than it would have been in 2012.
It’s important to note that David Reifschneider, senior associate director of the FRB’s department of research and statistics, and John Williams, once of that parish and now research director of the San Francisco Fed, are co-authors of the paper. That means this is as close to an official ‘Fed view’ as we are ever likely to get on the effectiveness of QE. Read more
Japan’s central bank has lowered its key rate from 0.1 per cent to a range of 0-0.1 per cent and will consider setting up an asset-purchase programme worth about $60bn to enhance monetary easing and achieve price stability.
The Asset Purchase Program is, at this point, a consideration rather than a promise: the Chairman has asked staff to examine the specifics and report back. For a consideration, it is quite well fleshed out, however:
The Bank will examine the new purchase of assets so that, principally, the outstanding balance of the total assets purchased will reach about 5 trillion yen after around one year from the start of the purchase, with about 3.5 trillion yen for long-term government bonds and treasury discount bills and about 1 trillion yen for CP, ABCP, and corporate bonds
The general reaction to Adam Posen’s speech on Tuesday has been to predict a 1-7-1 vote at next week’s Monetary Policy Committee with Mr Posen voting for a resumption in quantitative easing and Andrew Sentance voting for higher interest rates. I have no idea how the MPC will vote. But I do know that Mr Posen is not necessarily alone on the Committee in his central view that if demand is too weak, the risk is not just a temporary double dip but a persistent loss of output which can blight lives and an entire economy.
In fact, Mervyn King, the Bank of England governor made the same point at the February inflation report.
“I think if anything we’re more uncertain about how much spare capacity there is. It’s an extraordinarily difficult judgement to make, and I think the Committee – we had a long discussion of this – we were more inclined to think that this is a reduction in effective supply in the short run that could be reversed. So I don’t think we are confident that this reduction in supply capacity will necessarily persist. And indeed we are in a position where, if growth in demand were to be rapid, I suspect that much of the capacity which has been, quote, “lost”, would come back and be able to be used again, whether in the labour market or on capital stock.
Current policy rate: 0 to 0.25%
Consensus expectation: no change
Taylor rule policy: -0.5%
Headline consumer price index: +1.1% (August)
Inflation objective: around 2%
Notable special measures in operation
• Circa $2,000bn in completed asset purchases, including $1,100bn in mortgage-backed securities and $792bn in Treasuries.
• Size of the programme is currently stable. Capital payments from MBS are reinvested in Treasuries. Read more
Overdraft rates are at a record premium to the Bank of England base rate: the spread is 18.6 percentage points, the highest since records began in 1995. Central-bank-quoted overdraft rates rose to a record 19.1 per cent in August. The base rate, of course, remained constant at 0.5 per cent.
The fact that consumer-facing interest rates are rising in spite of a static and extremely low base rate will be of concern to policymakers. Unsecured debt levels, which rose slightly in July, remain extremely high and write-downs are increasing. This will add to the growing debate on the need for further extraordinary measures, such as credit easing. Read more