LONDON (MNI), Sep 17 – This week’s rash of post-purdah Bank of
England Monetary Policy Committee speeches, as well as recent economic
data releases, suggest no decisive shift in the balance of opinion
within the committee.
Recent data have failed to lift the fog shrouding the outlook.
Inflation data confirmed that the UK has an inflation ‘stickiness’
problem, while survey evidence points to a rapid deceleration in growth
in Q3 and retail sales showed their first monthly fall since the start
of the year.
Governor Mervyn King sounded a gloomy note on prospects for the
economy when he spoke to the Trades Union Congress on Wednesday,
signaling to them that the BOE would respond with monetary policy if
the recovery looked like stalling.
King noted that business and consumer confidence were weakening and
noted that broad money growth is “now barely growing at all”.
He also lamented the weakness in the UK’s major export markets and
the inability of the UK banking sector to finance the recovery ‘on the
usual terms’.
Speaking to what was expected to be an unfriendly audience, King
tried to justify his support for the UK government’s plan for draconian
fiscal tightening.
“If the recovery is slower than expected then the automatic fiscal
stabilisers – the lower tax receipts and higher spending that result
from weaker growth – will act to stimulate demand. And monetary policy
can react too, especially when there is a credible plan to reduce the
deficit,” King said.
“The road ahead is unlikely to be straight. There is considerable
uncertainty about the prospects for both the United States and the euro
area – our most important export markets,” King said.
“Business and consumer confidence at home has weakened recently,
and it will be some time before our banking sector is able to finance a
recovery on the usual terms. The transition to a better balanced economy
will be difficult. But we are already seeing encouraging signs of
expansion in manufacturing and UK exports,” he said.
The King speech, in many ways, proved the most unambiguously dovish
of the week – although that could have owed something to the audience he
was addressing.
The main theme of the comments from the MPC’s newest member Martin
Weale – to the Treasury Select Committee on Tuesday was that the
recovery was unlikely to be robust, but the path would have to
significantly disappoint compared to the August Inflation Report BOE
forecasts for any further quantitative easing to be undertaken.
“I think the economy is recovering. That recovery is likely to be
fitful, but I am comfortable with the policy setting that we have,”
Weale said.
“If things were to weaken sharply then I think monetary policy
should be the first line of defense,” he added.
Weale downplayed the chance of a rapid recovery, saying
“The profile of recovery from the trough of recession we have seen
recently is largely similar to the sorts of things that happened in
previous recessions.”
Weale sounded a bearish note on prospects for a further rise in
unemployment but adding he was comfortable with the BOE’s August
forecast.
Weale refused to be categorized as either a dove or a hawk during a
hearing which placed him very much within the MPC mainstream, contrary
to speculation ahead of his joining the committee that he would be a
dove.
The MPC’s reputedly most dovish member, David Miles, the last
member to advocate extending quantitative easing, also spoke this week.
His comments to a regional UK newspaper suggested that he is not itching
to pull the QE trigger.
“I am particularly concerned about inflationary pressures, since it
is our job [on the MPC] to keep the rate close to the 2% target and it
is uncomfortably above that at present,” he told the East Anglia Daily
Times.
With even Miles worried about current inflation outturns, chances
are that the release of minutes for the September meeting of the MPC
will show no change in the 8-1 split in favour of unchanged rates, with
only Andrew Sentance continuing to back a 25 basis point rate hike. The
argument between Sentance and the rest of the MPC has not yet been
resolved by the data.
Inflation concerns on the MPC will not have been helped either by a
nudge up in inflation expectations in the latest BOE/NOP poll. The
survey showed an unexpected rise in year ahead price expectations, with
the median rate coming in at 3.4% versus the 3.3% seen in May, hitting
its highest level since August 2008.
MPC Member Adam Posen also often ascribed dovish tendencies and
recently suggested in one newswire interview that further QE would be
the more likely next move in policy than a rate hike. He told a
Washington audience that the next policy move could be what he termed
“heavy credit easing”, the large scale purchase of private debt, rather
than traditional QE purchases of Gilts.
However, Posen too cautioned that this would only become necessary
if things take a dramatic turn for the worse.
“My feeling was credit easing would be more effective than
quantitative easing, because it would give you two or three bites at the
apple,” by allowing policymakers to affect risk in a particular market
in addition to adding liquidity, Posen said.
He has sounded this drum in the past and it is unclear what support
there is in the rest of the MPC for such a policy. Governor King has
expressed scepticism that the central bank can or should get
involved in credit support to specific sectors.
In King’s view coming to the rescue of the UK’s credit-starved SME
sector is more a problem for the government than the monetary authority
while large companies continue to enjoy relatively easy financing
conditions via the capital markets.
The MPC has left policy on hold since November last year, when it
pushed the scale of QE up to stg200 billion, and Bank Rate has been
stuck at 0.5% since March last year. The last dissenting vote on QE was
David Miles back in November 2009, and Sentance has been the sole
dissenter on Bank Rate.
The latest MPC comments give no sign of this prolonged policy pause
ending any time soon.
–London newsroom: 4420 78627492; email: ukeditorial@marketnews.com
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