In the Treasury Committee hearing today [this is a cross-party committee of the UK Parliament that monitors the Bank of England], BoE Monetary Policy Committee members several times made recourse to the ‘first line of defence’ metaphor.
For example, in discussing whether interest rates might be used not for monetary purposes, but for financial stability purposes, he noted that interest rates were not the ‘first line of defence’ for that problem.
The analogy isn’t great.
The implication is; if there’s financial stability problem, we do nothing about it with interest rates, until we have first tried our prudential tools. If that later is seen to fail, then we try interest rates.
Looming over the conversation too was the question of whether macroprudential tools might be used for monetary policy purposes. I didn’t hear it said, but doubtless MPC members would have used that language too.
Looked at through the lens of the kinds of models MPC and FPC use in the BoE, a better way to describe what ought to go on is: financial stability outcomes can’t be influenced much without great movements in interest rates that would otherwise be damaging for the monetary policy mandate; and vice versa. But though one tool is an inefficient device for achieving the other committee’s mandate, nonetheless it’s aways the case that each tool should be set with both mandates in mind.
So inaction with respect to the other committee’s concerns while their line of defence is tried first is not the right policy.
This becomes even clearer when we remember that the mandates for the two committees are not really ends in themselves. They are imperfect ways to judge how technocrats wield a policy lever or levers in pursuit of our overall wellbeing. They are more like intermediate performance indicators.
For sure, things might get very messy if the Treasury simply told the BoE: here are several policy levers. Use them to make us better off. But we should not take the particular assignment of tools and objectives that the BoE’s committees have grasped too literally. And nor, we must presume, do the Committees themselves.
Perhaps MPC members today meant what I am describing here, and it’s just that the ‘first line of defence’ metaphor was just a first line of defence.