Minutes from the Bank of England’s last policy meeting – where a £50bn expansion of the existing £75bn quantitative easing plan was decided upon – have just been released.
And they reveal a not inconsiderable degree of uncertainty. A few exemplars:
The MPC’s programme of asset purchases was intended to affect the economy by boosting the money supply and nominal spending. But it was too soon to see that in the data.
The Committee reached its policy decision in the light of the projections to be published in the Inflation Report on Wednesday 13 May. The outlook for economic growth was unusually uncertain. The sharp downturn in global economic activity, combined with the process of adjustment underway in the UK economy as households and companies, especially in the financial sector, restructured their balance sheets, continued to act as a significant drag on growth.
Whatever the outlook over the next year, the strength and sustainability of the recovery in the medium term was uncertain. On the one hand, the contraction in world demand and trade could be protracted; households might save more; and the availability of credit to companies and households might improve only gradually. On the other hand, it was possible that the substantial scale of the economic stimulus in train could prompt a rapid rebound in economic activity.
The outlook for inflation also remained extremely uncertain. The margin of spare capacity that was likely to persist over the forecast period would bear down on CPI inflation. That was partly offset by the upward pressure associated with the pass-through of sterling’s depreciation to consumer prices.
As for the decision itself:
There were some arguments for not extending the £75 billion asset purchase programme this month. There was uncertainty about the impact of asset purchases on this scale to stimulate nominal spending. The Committee would learn a considerable amount about the transmission mechanism of asset purchases in the coming months. There were also signs that economic conditions could be starting to improve. There was a substantial degree of monetary stimulus already in train and, given the uncertain nature of the transmission mechanism, there was a risk that the Committee would not be able to identify early enough when it should be withdrawn. With the benefit of more information on the impact of its existing asset purchase programme, the Committee would be in a better position to judge these issues at future policy meetings.It’s all very much a question of playing things by ear.
What caught our eye though, was this:
Market participants appeared to expect Bank Rate to rise around the turn of the year and to continue increasing thereafter. It was possible that the publication of a projection, based on market yields, in which inflation was more likely than not to undershoot the target might lead the market yield curve to fall, delivering an additional degree of monetary stimulus.
Moral suasion is, of course, an extremely powerful tool in the central banker’s kit. When the Bank of Japan began its own form of QE, it repeatedly told the markets that it was going to keep rates at zero – ZIRP – for years to come was a major plank of policy.
Indeed, Ben Bernanke wrote about central bank interest rate expectation management as a key policy tool extensively in 2004:
…a central bank may hope to affect financial markets and economic activity by influencing financial market participants’ expectations of future short-term rates… even with the overnight nominal interest rate at zero, a central bank can impart additional stimulus by offering some form of commitment to the public to keep the short rate low for a longer period than previously expected. This commitment, if credible, should lower yields throughout the term structure and support other asset prices.
Related links:
UK: The attractive investment choice – FT Alphaville
BoE sees inflation swinging both ways – FT Alphaville