LONDON (MNI), June 20 – The Bank of England’s Monetary Policy
Committee spent a chunk of its June 6 and 7 meeting debating alternative
ways of providing stimulus to bulk gilt buying but its members were
unpersuaded they should change tactics.
With four of the nine members, including Governor Mervyn King,
voting for further quantitative easing in June, and others accepting
more stimulus was likely to be needed at some point, the third wave of
QE is looming large – and it looks set to be a re-run of the first two.
The MPC looked at three policy options: the case for cutting Bank
Rate, but concluded it could be counter productive; at altering the
remuneration structure on banks’ reserves, but passed swiftly over this;
and at steps to bolster lending and curb increases in banks’ funding
costs.
Money markets took the view after the minutes were published
Wednesday that a Bank Rate cut is almost off the table for now.
Markets had been pricing in a substantial chance of a Bank Rate cut
at next month’s MPC meeting but after the release of the minutes the
implied chance of a 25 basis point rate using SONIA (the Sterling
Overnight Index Average) fell to around 12% from around 40%.
The BOE is actively seeking to tackle the issue of weak growth in
bank lending and rising bank funding costs. King, in his Mansion House
speech last Thursday, unveiled a trio of policy initiatives, on
liquidity, regulation and a joint plan with the Treasury to provide
cheap funding for increased bank lending.
These, however, look set to be little more than a sideshow, at
least in the short term, and are not a matters for the MPC to decide on.
Only the liquidity insurance policy has actually been implemented,
with the BOE holding its first Extended Collateral Term Repo auction
Wednesday.
There was disappointment in markets that the first of the monthly
ECTR auctions was for only Stg5 billion, a small fraction of the Stg265
billion of collateral the BOE has said banks had pre-positioned by
March.
King said the Funding-for-Lending plan, the joint initiative with
the Treasury, could be ready in weeks. Analysts note, however, that all
the details of the plan are lacking and they harbour serious doubts over
how well it will work, with the results of previous government
inititiatives to bolster bank proving underwhelming.
The BOE’s regulatory initiative, to reduce banks’ liquidity
reserve requirements, raises a host of tricky questions over whether
the UK central bank can go it alone on this or will seek an
international accord.
All of these issues are matters for the BOE executive, with MPC
policy centred yet again on its vote on whether to extend QE.
Improving bank liquidity and bolstering lending could, at the
margins, enhance the effectiveness of QE.
The BOE’s in-house research has highlighted how exceptionally
tricky assessing the impact of the first wave of QE was, with various
models throwing up a wide range of results, so the MPC is unlikely to
place great weight on any purported strengthening of its impact.
The committee instead will reconvene in July with the debate yet
again focussed on extending conventional QE.
Many analysts are now predicting the MPC will vote for a further
Stg50 billion of QE next month and, as Deutsche Bank Chief Economist
George Buckley says, “QE3 will be identical to QE2.”
Having refined its maturity buckets for gilt purchases and finessed
its purchase operations, the MPC looks set to simply press the restart
button on mass buying of gilts.
“The Committee agreed that asset purchases remained an effective
tool for lowering a range of market interest rates, supporting asset
prices and so nominal demand,” the minutes said.
The debate was between the four MPC members who thought more QE was
needed immediately and the five who, rather than having any strong
opposition to extra QE, simply favoured a wait-and-see approach.
The majority said “that further stimulus was likely to become
warranted at some point” but wanted to see how several key euro area
events panned out in coming weeks and to see what happened with bank
funding costs and market interest rates.
In an interview published after the release of the minutes, MPC
member Ben Broadbent, who was in the no-change camp, said that the
deterioration in business surveys across wide swathes of the world and
the headwinds from the Eurozone have added to the case for additional
stimulus.
“I would certainly say the case has grown since the May Inflation
Report for some sort of intervention,” Broadbent told Reuters news
agency.
One wrinkle at the July meeting was that Executive Director Markets
Paul Fisher voted for Stg25 billion of further QE, while King, David
Miles and Adam Posen all went for Stg50 billion.
This raises the question of what would happen if, say, next month
one other MPC member joined Fisher in voting for Stg25 billion – leaving
a majority in favour of more QE but with no majority in favour of a
given amount.
The answer is understood to be that King would look for a
consensus, asking the MPC members backing more stimulus if they were
prepared to shift the amount they were prepared to vote for up or down.
This attempt at consensus forming prior to the vote would not be
recorded in the minutes, which jump from a discussion of the policy
decision straight to the vote.
The decision to endorse a larger or smaller amount of QE could
hinge as much, or more, on the strength of MPC members’ convictions in
favour of a given amount as the numbers backing each. If the Stg25
billion camp dug their heels in, they could hold sway.
-London newsroom: 00 44 20 7862 7491;
email: drobinson@marketnews.com
[TOPICS: M$$BE$]
