LONDON (MNI), Aug 17 – Bank of England minutes make clear that in
the face of the global growth slowdown and the intensification of the
euro zone debt crisis the Monetary Policy Committee will rely on keeping
rate expectations ultra low for the foreseeable and will keep the
relaunch of quantitative easing, QE2, in the emergency tool box.
While the decisions of BOE Chief Economist Spencer Dale and MPC
Member Martin Weale to pull their rate hike calls went contrary to
analysts’ median forecasts there was already plenty of evidence in the
August Inflation Report to fully rationalise their policy switches.
Weaker economic activity data over recent months, accompanied by
the signal failure of pay to show much response to higher inflation
outturns, had most likely already got Dale and Weale reconsidering their
rate view.
Signs that growth in the euro zone and in the U.S. was sputtering
in Q2, along with the twin fiscal crises as well as the knock-on impact
on equity and other asset markets, provided the hay bale that broke the
camel’s back for them.
As the intellectual father of the August Inflation Report, Dale
would have difficulty sustaining the argument that rates still needed to
rise. The Inflation Report’s numerical parameters out today highlighted
how stark that forecast was – even with rates unchanged until Q3 2012 –
inflation is well below target at a sliver over 1.7% in 2 years time.
The clear downside direction in the data ahead of the minutes will
have no doubt reassured Martin Weale that there is precious little
chance that economic developments would oblige him to flip-flop in the
months ahead.
The minutes show how far the latest twist in the ongoing
financial-economic-sovereign feedback loop is forcing similar – if not
uniform – policy actions on G7 monetary authorities.
The European Central Bank dropped its plans for a rate hike in
September in the light of intensifying growth concerns while the Fed has
turned its former ‘extended period’ mantra into a quasi-pledge to keep
rates low for 2-years.
The former is busy buying peripheral bonds as well, while the Fed
could yet launch QE3 down the slipway. The MPC says it is considering
further asset purchases and certainly seems to have overcome its recent
fleeting qualms about even discussing QE2 – but with inflation set to
hit 5% in coming months, the public relations hurdle is still high.
The minutes make clear that while QE2 is regarded by the MPC as an
available tool – this is only in the sense of ‘in case of emergency
break glass’. More than one member of the unchanged policy camp looks as
though they are open to the idea –
“Some members considered whether there was a case for increasing
the degree of monetary stimulus by undertaking a further programme of
asset purchases. Those members concluded that the case was not yet
strong enough, particularly in light of the lower path for Bank Rate now
implied by financial markets. Further asset purchases might nonetheless
become warranted were some of the downside risks to materialise”.
The remarks are in line with those made by David Miles in an
interview with Dow Jones Newswire in recent days and his view may well
be the same as those of BOE Executive Director Markets Paul Fisher, who
has made favourable noises about possible QE2 in the past.
Short of a full-blown euro zone crisis and the further severe
stress that that would put on the UK banking sector – it is hard to see
where more backers for QE2 would come from. BOE Deputy Governor Paul
Tucker has been publicly sceptical and even the governor himself has
explicitly stated that it would pose a risk to the bank’s credibility at
a time when headline inflation is so far above target.
Hawks Dale and Weale look opposed – they still have their concerns
that persistent high inflation outturns could contribute to elevated
inflation further ahead.
“Some other members remained particularly concerned about risks to
the upside associated with a sustained period of above-target inflation.
For them, plausible outcomes for productivity growth, company margins,
the degree of spare capacity in firms, or import price pass-through
could also result in inflation remaining elevated. But recent
developments had weakened the case for removing some of the monetary
stimulus”.
The minutes show that the hurdle to QE2 is high – indeed they spell
out exactly how high it is.
Most MPC members took the view the threat of an intensification on
the euro zone crisis should not influence policy setting.
Downside risks from a further escalation of the euro zone crisis
“were almost impossible to calibrate in terms of their probability or
impact”, the minutes say.
“Members of the Committee held differing views about the extent to
which those risks should influence the Committee’s immediate policy
decision. On balance, most members saw little merit in seeking to react
to the possibility of these risks crystallising by adjusting monetary
policy in advance”.
That further downside risks to the euro zone might materialise is
hardly out of the question – if anything, it’s on the cards if the past
year’s sequence of market panics followed by repeatedly inadequate EU
policy responses has been anything to go by.
The medium-term aspirations from Tuesday’s Franco-German summit
disappointed market expectations for a more concrete solution to the
immediate crisis facing the zone.
While the latest market panic has calmed somewhat, there will
undoubtedly be more turmoil to come as markets push EU leaders to find a
more concrete solution to the debt crisis.
Unless, and until, that turmoil occurs, finding more QE2 supporters
on the MPC to join Adam Posen, who continued to vote for an extra stg50
billion in QE, will be tough.
Potential QE2 supporters – like Fisher and Miles – still need to be
convinced while Deputy Governor Charles Bean seems to have some doubts
about the extent of the spare capacity in UK firms – according to
comments he made at last week’s Inflation Report press conference – that
possibly limit his support for asset buying at the margins.
For the time being, the MPC is obviously happy for lower market
rates to take the strain of supporting the economy.
In the meantime though, keeping the QE2 speculation slightly warm
may also help to keep those rate expectations ultra-low.
–London newsroom: 4420 7862 7492; email: dthomas@marketnews.com
[TOPICS: M$B$$$,M$$BE$]
