Yesterday the Bank of England’s monetary policy committee decided not to cut interest rates, despite most forecasting that it would. There was an innovation in monetary policy communication however. Although it would not cut rates today, the minutes revealed that most MPC members expected to vote for more stimulus at their August meeting. This was a very clear departure from the old practice, under the previous governor, of, as Mervyn King used to put it ” playing one ball at a time”. This part of the decision is welcome. Many both inside and outside the Bank of England have been explaining the benefits of this kind of forward communication. Monetary policy works not just via current rates but via expectations of future rates. If a committee has a sense of what it intends to do in the future, it should communicate that as clearly as it can to those who are affected by its decisions. Policymakers that I spoke to usually objected to this logic on the grounds that it was too difficult for committee to vote formally on an interest rate path, and that was a danger of a forecast being taken as a promise, and therefore of the committee suffering reputational damage when it did not keep the apparent promise. To some extent these difficulties seem to have been swept aside by this little detail of the July 2016 minutes.
However, the July decision by the majority (one dissented) begs the question: if the committee thought it would loosen at its next meeting, why not loosen now? The reasoning seems to have been the following: although the committee recognised that monetary policy was too tight, it did not know exactly how much loosening was needed, and it would not know with enough precision until the staff had gone through the process of compiling the August inflation report forecast. There was therefore a possibility that the committee might loosen now, and then have to loosen by more in August, or even undo some of the loosening. The majority must have judged that the risk of looking incompetent by tinkering with the instruments each month in this way outweighed the benefits of moving promptly.
The dissenter, Jan Vlieghe, took what I interpret to be a more nuanced view. The logic may have been something like this. It was clear that interest rates would have to be cut down to a new lower floor, and more easing would need to be imparted by asset purchases. It was highly unlikely that a 25 basis point cut to rates would need to be reversed. Even if this were so, it is pretty costless to reverse interest rate changes. Zigzagging asset purchases could be much more costly and make a mess of debt management. So cut rates now, and wait until there is more certainty about how much extra stimulus needs to be imparted through asset purchases.
Why the others could not go along with this is not clear. Perhaps the others don’t agree that the new floor is 25 basis points. If the new floor was judged to be zero, then cutting that far in advance of an inflation forecast would raise the chance of having to reverse course later.Or perhaps they think that the shock and awe effect would be diminished by imparting stimulus with one tool in one month, and another tool in another month.
Today, text of a 30th of June speech by Andrew Haldane was released, in which he calls for a “prompt” and “muscular” loosening. For my money, the loosening won’t be as prompt as it could have been. Although I can see the logic of waiting, I’m sceptical that much will be got by way of precision about exactly how much loosening will be needed from doing another inflation forecast. And it remains to be seen whether, however much unconventional monetary policy is undertaken, this is effective enough to amount to something that could be described as ‘muscular’.
longandvariable 
A week after the referendum Mark Carney said “some monetary policy easing with likely be required over the summer.” Was it confusing for markets to say that and then stay put yesterday? Did it damage credibility? Should the Governor have made that statement when it is the MPC that decides policy and not just him?
All fair questions
Indeed. I notice the phrase ‘unreliable boyfriend’ has been bandied about again. It does seem odd to describe the July and August meetings as a package, and then do nothing at the first of those.
Based on the most recent public data from the BOE (the May Bankstats) the biggest component of credit in the UK economy, household credit, is growing at 4% pa which is the highest since pre-GFC. Credit card loans are growing at 6% pa, personal loans 12%, and mortgages 4%. These rates of growth tend to move in broad trends following employment levels (which are the highest ever) and household balance sheets (which are robust). So it is far from clear to me that monetary policy is too tight. What evidence do you have to support the claim that monetary policy is too tight? As of end May credit growth of 4% plus greatly exceeds the 0.5% cost of money.
There have been numerous trading statements from economically sensitive British businesses since the vote, such as recruiter PageGroup, builder Redrow, building products merchant Marshalls, homegoods seller Dunelm, and while all obviously acknowledge the uncertain demand environment all report perfectly decent results. It is not clear to me where the large jump in unemployment required to freeze credit growth is going to come from?
Since you wrote this, not on account of you writing this, there has been some push back on the need for interest rate cuts. Prof Thomas, MIT, had a piece in the Telegraph, which touched on growth. One other member of the MPC also had a push back against the markets in the Guardian. Or were both push backs against A Haldane’s speech made shortly after brexit but published two weeks later. It seems unlikely that there will be a rate cute at all at the next meeting. Growth figures revised upwards are starting to militate against it as also are the BOE spys’ reports of not much change. Better save the barrels for later, if necessary.
It all makes the first meeting look incredibly wise and calm.
Sorry but I should also have said that the last meeting announced a revised projection on growth from 0.3 to 0.5. This seems to have slipped under the radar of most analysis. Though hardly a boom the revision upwards shows there is no pre-brexit slowdown and most have been influential in leaving rates unchanged. If as time progresses in this post brexit short run there is no sign of a slow down either, as the John Le Carney’s men seem to suggest, then rates won’t go sown at the next meeting either.
I guess 6-3 in favor of a cut/QE
You might be right in your guess. But would you agree with it or do you think they would be better holding baack til later if necessary. With data coming in all the time they might not still have enough to make an informed decision even at the next meeting. There must be more q2 data available by then and if growth remains at last projection or goes up again then they won’t cut and shouldn’t. How would the markets react if they didn’t cut. If a cut is priced in already and doesn’t happen will that mean the current relative calm will get disrupted by the market repricing. It is all very worrying but the markets need a dose of these new anti-brexitisosis tablets that I am trying to take. I mean the antihysteria-brexitisosis tablets. They could be called wait for the data tablets.
But it is difficult to do analysis at such times.
What do you believe the goal of a QE programme would be?
Can employment be meaningfully increased from the current level? Can private sector credit be made any cheaper? The latest average for a 2 yr fixed mortgage with a 75% LTV is just 1.8%! Gross lending to first time buyers was up 22% year on year as of May – access to credit is not obviously a problem.
Moreover, banks sacrifice about 50bps of margin writing new mortgage business versus their current stock of mortgages, that is a 20% hit to their profits. Already in Q1 there is evidence Lloyds Bank was protecting its profit margin by limiting growth in new mortgages.
For the consumer interest payments on mortgages are currently about 8% of income, that is the lowest since at least 2002, and almost 70% less than in 2007. It is unclear to me that the level of interest payments is in anyway constraining consumer spending.
QE ‘worked’ in the US because the cost of credit for consumers, specifically mortgage debt, was extremely high versus the cost of credit for the government. Lowering[the mortgage burden on households really helped. QE is working in the Eurozone because the cost of credit for businesses and households in Spain/Italy was extremely high versus the cost of credit in Germany. Easing the debt burden in Spain and Italy is hugely helping those economies: Spain has added 1mln employed people since 2012.
How is QE going to work in the UK with the cost of credit so low and employment so high? what is the objective here?