Since Mark Carney took over the Governorship of the Bank of England in July 2013, expectations of the first hike in rates from 0.5 have been pushed further and further back.
Accommodating this – with a few hiccoughs along the way – has been the MPC’s sole tool for easing monetary policy. Carney inherited the collective view of MPC formed under Mervyn King that the practical floor to rates was 0.5%. So loosening then meant either more QE – which Carney was clearly able to persuade other MPC members was undesirable, or ineffective, or both – or yield curve loosening.
In February 2015, however, the Bank of England made clear that it no longer considered the floor of 0.5% to be operative. So at that point, it obtained a new option for easing, on top of yield curve talking. Yet since then, policy has been eased without using this extra tool.
This isn’t obviously wrong. It’s entirely possible that the best path for rates involved keeping them just where they were, but where adjustment was purely through the timing of the first hike.
But a clear starting point for thinking about how to change the plan for rates offered by models like the Bank’s own COMPASS would be that as conditions worsen, rates are lowered – relative to the old path – for a while, and then raised again subsequently.
This latest Inflation Report could have been the point to do just that. The forecast under the market path the BoE used involved a small overshoot of the target. But this doesn’t rule out a cut now, and a more marked tightening path later on. I wonder: have these trajectories been tried out in the Bank, but ruled out?
I wonder also if the reluctance not to use anything other than yield curve tightening is the worry that if rates were cut, without a device – like an interest rate forecast – to communicate clearly how the BoE would make up for it later, they would loosen monetary conditions too drastically, or at any rate inject more uncertainty into longer rates than they wanted. Consequently, confining themselves to the broadest of verbal hints, the MPC are thus disproportionately reluctant to breach the 0.5% that has been the floor to rates since March 2009.