More than forward guidance?
The bold new world of UK monetary policy is drawing close – excited yet?
The nine men who make up the Bank of England’s Monetary Policy Committee have been meeting yesterday and today to decide not just this month’s interest rate/QE decision but also, more significantly, the precise kind of remit they will follow in the future.
In case you’re new to the issue, here’s a quick recap: since 1997 the Bank has been duty-bound to try to hit an inflation target, set by the Government at (at present) 2% on the Consumer Price Index. (Yes, I know they haven’t done the best job, but let’s leave that issue for the time being.)
The Chancellor has now slightly modified this remit. Although the inflation target part remains, he has given the Bank the option of exploring alternative ways of controlling the economy, including so-called “threshold guidance” (in laymen’s terms: committing to keeping interest rates at a certain level until a given economic indicator perks up).
What we learn at the Inflation Report next Wednesday is how precisely the Bank’s new Governor, Mark Carney, intends to structure the remit. What most economists expect is a commitment to some form of forward guidance (eg: we will keep interest rates unchanged until unemployment drops beneath a certain level). That would be something of a sea change, though, as I’ve pointed out before, strictly speaking it isn’t actually as much of a departure from past form as some would lead you to believe.
However, I do wonder whether there will be more of a shift – beyond this subtle change in the remit. Specifically, I suspect the Bank may well begin using its balance sheet to buy up private assets, rather than the Government debt it has been buying under its quantitative easing programme.
This would be akin to what the Federal Reserve has done in the US, buying up mortgage-backed securities, amongst other things. My reasoning is quite simple: the main person blocking doing something like this earlier was Sir Mervyn King. Now he’s out of the picture what’s stopping the Bank carrying out this so-called “credit easing” – buying up mortgage debt or, for instance, RBS shares or debt? And what’s stopping it doing so (with the proceeds of expiring gilts) immediately?
I’m not suggesting that forward guidance won’t play a key role under the Carney Bank of England: more that it is unlikely to be the only change.
The other question is one of sequencing. The Bank has committed to telling us all about this brave new world in the Inflation Report press conference next week – but the MPC members’ decision itself happens this week (in fact, the one on the new remit has been taking place informally over previous months). So, will the Bank divulge anything about the remit this week? It’s a question of more interest to investors than most households, and there is a mix of views – though it’s my guess we’ll get another vague statement this week hinting that future expectations of rates are still too high, and most of the real detail will come next week. Though there’s nonetheless a chance, as I said, of more fireworks – particularly if the Bank does indeed commit to buying non-government bonds.
Either way, monetary policy in the UK is indeed about to change its complexion, and, at the very least, its accent, for the first time in well over a decade. Prepare yourselves.