At today’s Inflation Report press conference, BoE Governor Mark Carney dismissed one question by refusing to say whether the MPC might have cut rates in the hypothetical situation in which the yield curve had not flattened and provided stimulus.
It’s worth pointing out that in an ideal world monetary policy makers would answer as many hypotheticals as humanly possible. Since these would help describe the monetary policy reaction function. That would make policy more predictable. And it would make it more potent, as news that came in would work more strongly to influence expected future rates than when policy reactions are harder to follow.
An embrace of the hypothetical would also help the accountability process. If we knew in advance how an oil price shock caused by supply changes would have been treated, we can see whether the BoE follows through; and, if not, whether the change of plan is based on sound analysis, or looks like expediency. Knowing that they faced such scrutiny, policy would be less vulnerable to erratic or expedient changes of course. And knowing all this, observers would have improved confidence in policy and the framework.
Of course, what’s concerning is that a distaste for hypotheticals is rooted precisely in wanting to preserve maximum discretion. The capacity to be able to rationalise everything you do when you do it as the optimal response to events at that time, unconstrained by any prior public positions you may have taken.
Is it possible that one day we might have an MPC member who, responding to a question from a journalist, said ‘well, as you know, I feel it of paramount importance to embrace hypotheticals like that in order to clarify our reaction function and thereby improve the efficacy of policy’?