Published instrument plans: the Financial Policy Committee do what the MPC dare not

The Bank of England published its Financial Stability Report, and, along with it the decision of its Financial Policy Committee to raise the counter-cyclical capital buffer from 0 to 0.5%.  Interestingly, there is also an announced plan to raise this further in November to 1%, on the presumption that the economy, and along with it financial stability risks, evolve as FPC expect them to.  So the FPC has agreed and disclosed an instrument plan for its macro-prudential instrument.

This seems to be beyond the Bank’s Monetary Policy Committee.  For monetary policy, we have decisions about today’s instrument settings [interest rates and QE] and a published forecast conditioned on an estimate of what markets are guessing for those settings over the future.  And we have speeches, which make references to the chance of a hike in the near term and the likely destination of rates in the longer run, that are coded to differing degrees.

Two arguments made against interest rate and QE plans were these.

‘How could a committee of 9 people, who find it hard enough to agree decisions for today’s instruments, possibly have a manageable discussion about a whole sequence?’

And:  ‘If we publish plans, they will be misunderstood as promises for instruments to do this come what may, and when actual settings deviate, people will think we have cheated and our credibility will suffer.’

These objections, in principle, would seem to hold also for FPC, but they have found a way.


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