-Inflation Report, King Comments Show Death Of QE Greatly Exaggerated
LONDON (MNI), Nov 14 – The Bank of England’s November Inflation
Report undermines the belief that the Monetary Policy Committee has
ended quantitative easing.
A recent keynote speech from BOE Deputy Governor Charles Bean
questioning how much of a stimulus effect further asset purchases would
have and warnings on sticky inflation from some of his colleagues
persuaded many BOE watchers to pull forecasts of another stg50 billion
tranche of QE.
While the MPC did not announce any further QE at its November
meeting, the call by some pundits that the MPC has come to the end of
the road on QE may turn out to have been premature.
The central inflation projection in the November report is markedly
higher than in the August one, but still shows inflation eventually
falling back below target. The November forecast projects CPI above the
2.0% target until Q3 2014 before dropping to stand at 1.8% two years
ahead, while in the August report CPI was forecast to be back below
target by Q4 2013.
That inflation forecast still leaves the door ajar to more stimulus
and there are no shortage of downside risks out there that could
materialize and make further stimulus necessary.
While the Inflation Report did not touch on the controversial
decision to transfer coupon cash on the BOE’s holdings of stg375 billion
of gilts, handing the Treasury a stg37 billion windfall, Governor Mervyn
King was grilled on the subject at his press conference.
King’s comments strongly implied that – without the surprise change
in how the QE coupon cash is managed – the MPC could well have been
persuaded to hike the stock of QE.
“We know that there is going to be approximately stg37 billion of
equivalent asset purchases implied by the transfer of coupons in the APF
fund to the Treasury. That will take place over the next ten months.
Given that that is going to happen, given the outlook for inflation, I
think that the committee felt that no change was the right decision last
week,” King said.
Otherwise, King played down the importance of the move, suggesting
it was nothing more than a cash management reform to align UK practice
with that of the US and Japan.
“To be honest I think there’s a lot of fuss about nothing with this
scheme (transfer of coupons). I don’t think it affects anything very
much,” he said.
But the timing of the move – three weeks ahead of the December 5
Autumn Statement – and the fact that King is widely perceived to have
been too closely associated with the current government’s fiscal policy
in the past – has not done the reputation of the central bank much good.
It hasn’t helped either that the move has been portrayed in the
media as a dodge to allow Chancellor of the Exchequer George Osborne to
avoid an embarrassing admission that the government’s is off-beam on its
long-term debt reduction target.
King struggled to answer this criticism on reputational damage at
his press conference but said that the Treasury’s actions had been
perfectly reasonable and made the clear point that the MPC is still in
control of setting monetary conditions, as the committee simply has to
factor in the impact of the transfers into its decision making.
“The Treasury are the beneficial owners of all the money in the
Asset Purchase Facility. They’re taking some cash out now. It’s
perfectly reasonable to do that rather than issue gilts, to allow the
cash to stay in the APF,” King said.
“It’s what happens in Japan and the United States. We know what the
effect of this transfer will be, we will offset that in our own asset
purchases, we remain firmly in control of monetary conditions,” King
added.
On the face of it, the move ought to marginally add to the bias
against further QE in coming months.
King, however, studiedly emphasised throughout his presser today
that QE is still an effective monetary policy tool, even if its impact
varies over time.
“There are limits to the ability of domestic policy to stimulate
private sector demand … But the Committee has not lost faith in asset
purchases as a policy instrument, nor has it concluded there will be no
more purchases,” he said.
Yet King reiterated that all monetary policy can really achieve in
the current situation is to delay the needed but painful rebalancing of
the real economy. On the latter progress is woefully slow, both in the
UK and globally.
“What the UK economy needs is more demand in the rest of the world
to buy goods from the United Kingdom. That is the key bit that’s missing
from our attempt to rebalance. That’s why the challenge is so great.
We’re not the only economy in that position,” King said.
A drop in sterling’s exchange rate would obviously help that – but
since mid-2011 and the intensification of the euro crisis, sterling has
gone 8% in the wrong direction on its effective exchange rate, King
lamented.
“That is not a welcome development,” he said.
The overall thrust of this report and its inflation and growth
forecasts leaves the door open to further QE.
While the inflation forecast hovers just below 2% in two years time
that is on the basis of implied market expectations of a slight fall in
Bank Rate – something looks unlikely if recent noises from officials are
anything to go by.
The growth/inflation trade off in the report, however, has once
again worsened.
The growth outlook has been significantly lowered. Economists at JP
Morgan calculate the BOE’s implied 2013 growth forecast is now just 1.2%
compared with 1.8% in the August report.
The report also cites a ‘material risk’ even to that lower growth
forecast given the weak global and euro area outlook. And, while
near-term inflation pressures have increased – thanks to the hike in
tuition fees and rises in energy bills – these will surely continue to
strain household buying power.
“There was a material risk that growth could remain weaker for
longer,” the report noted.
Reports of QE’s death seem to have been greatly exaggerated – not
least in the sense that the coupon move amounts to QE by proxy.
Crystallisation of that ‘material risk’ to growth could easily prompt
more asset purchases.
As King made clear – there has been no decision not to do more QE.
-London newsroom: tel+44 207 862 7492; e-mail: dthomas@marketnews.com
[TOPICS: M$$BE$]
