On the assumption that the Monetary Policy Committee loosen at their August meeting, the question arises as to what unconventional policy might be undertaken. There is a clear indication in the July minutes that this is under consideration. I have been asked many times in the last two weeks what they will do and find myself at a loss to guess. There are two difficulties in trying to figure it out.
First, by revealed preference, Carney and others have been sceptical about the worth of purchasing government securities. A few reasons for saying this: to begin with I’m sure that Carney himself went on record while he was at the bank of Canada on the subject, though my RSI prevents me from doing a thorough check now. If anyone knows for sure, please let me know. Another reason: during the time between Carney was appointed as governor in 2013 and when he actually took up post, the bank was reviewing the usefulness of forward guidance as a means to impart further stimulus which there was a fair case for that time. Carney was clearly very much in favour. And that was no talk then of simply extending asset purchases and not bothering with what might have been viewed as a risky communications innovation. Of course by the time late summer 2013 came, the economy had moved on somewhat and the case for further stimulus evaporated. So although forward guidance was undertaken Carney was left with the awkward task as presenting it not as a means of further stimulus but as a means of providing clarity about future interest rates. A final piece of evidence: one can view the last two years as a sequence of disappointments as inflation continued to stay stubbornly below target refusing to return back to it as previously projected. The committee under Carney was content to respond to these disappointments by signalling either explicitly or implicitly – and not always terribly well – that the time at which interest rates would begin to rise had been postponed. An alternative, course, would have been to undertake more asset purchases. The fact that this alternative was set aside indicates that such purchases were maybe viewed as undesirable or ineffective.
The Committee may think instead about purchasing private sector assets. But getting into a position where the bank can execute these on any significant scale requires many operational steps, several of which will be hard or impossible to undertake in secret. For example, to do this in an orderly way, and in a way which minimised financial risk to the bank, or reputational risk, would require announcing in advance what kinds of assets will be purchased, consulting on the design of platforms on which this will be done, and the design of reverse auctions, and perhaps even hiring significant credit risk capacity (which the Bank of England does not currently have) all contracting this out somehow.
So my best guess would be that if the bank is thinking seriously about this it is only as a contingency, and they would not currently be anywhere near ready to do it. The post Brexit evolution of the macroeconomy does not look good. [Viz this morning’s PMI release]. That said, some of the really scary scenarios involving a meltdown in financial markets, do not yet look like materialising. But that said, given how seriously the bank clearly took such possibilities before the vote, it’s curious – if indeed I am right about inferring this lack of readiness from a lack of outward signs– that more was not done in advance by way of practical preparation for the purchase of private sector assets on behalf of the monetary policy committee.
So, if you are one of those who has not yet asked me what the Monetary Policy Committee will do in August, you can see from the above as it is probably not worth asking me.