By David Thomas
LONDON (MNI) – Bank of England minutes for the Monetary Policy
Committee’s July meeting confirm the degree to which officials are
thinking across the file in their search for ways to revive the
economy and strengthen their fallout shelter from unfolding events in
the euro zone.
Key to the 7-2 split in the MPC’s vote for stg50bn more QE was the
announcement by the Bank and UK Treasury of its new ‘Funding for
Lending’ scheme which could potentially lift lending by stg80bn or 5% of
current total bank lending.
The moves were also key to the rest of the Committee opting for
a stg50bn boost to QE rather than a stg75bn hike. The MPC agreed also to
slow the pace of purchases, saying that the latest stg50bn would take
four months to complete.
The BOE’s Extended Collateral Term Repo and regulatory moves agreed
at the interim Financial Policy Committee which will allow banks to
lower their liquidity buffers have added to this phalanx of mutually
reinforcing policy measures.
While the committee was split on the QE extension, it was unanimous
on the need for more stimulus of some kind.
“…all members of the Committee judged that further economic
stimulus was required in order to meet the inflation target in the
medium term.”
MPC members concurred that the FLS, the ECTR and moves to lower
regulatory liquidity buffers would provide a “potentially significant”
stimulus but this would be “hard to calibrate”.
For the two dissenters – “they expected the policy initiatives
announced during the month to have a sufficiently large impact on the
supply of credit and on economic activity that no further stimulus was
warranted at this meeting”.
It is not just the BOE that is seeking alternative approaches. In
addition to the FLS, the UK Treasury also has its stg20bn Credit Easing
(National Loan Guarantee Scheme) now up and running following its
approval by the EU competition authorities.
In a bid to ease tensions with their restive Liberal coalition
partners over economic policy, Chancellor of the Exchequer George
Osborne and Treasury Chief Secretary Danny Alexander have announced a
stg50bn ‘UK Guarantees’ plan to ease financing constraints on key
infrastructure projects and on exports.
The new measures hardly signal the end of QE, just a more precision
tool approach and a recognition that asset purchases have been a bit of
a blunt instrument.
As the minutes recognise – “It now seemed possible output would be
roughly flat over 2012 as a whole, implying a period of two years where
there had been little or no economic growth”. BOE officials are
accustomed to citing the so-called ‘counterfactual’ scenario when it
comes to defending QE from this critics, but the response is
wearing thin as the economic results continue to disappoint.
More urgent still, risks from the euro zone continue to escalate.
“Notwithstanding the initial positive market reaction to the
political developments within the euro area (Greek election and the June
28 summit), very substantial risks there remained. These could, if they
crystallised, have a considerable impact on economic activity in the
United Kingdom and the stability of the global banking system”.
“There were increasing signs that the threat of a disorderly
resolution of the financial tensions in the euro area was affecting
growth at home”.
And it is only going to get worse. Greece will likely need a new
bailout within weeks, Spanish 10-year yields have been over 7% recently
and Italians are around 6% – levels generally seen as unsustainable. The
June euro zone accord on an eventual banking union could easily turn
into a disaster and the European Stability Mechanism installation is
being held up by the German constitutional court.
BOE officials recognise the dangers. Assumptions underlying the
recently announced FLS plan show that they will be happy if it
only manages to stop lending from collapsing in the event of a new euro
financial meltdown.
The ECB has taken up the slack arising from the disappointing
political progress. The BOE will no doubt be keeping its eye on the
impact of its zero deposit rate on lending growth. The Danish deposit
rate is already into negative territory.
Which brings us to the intriguing discussion in today’s minutes of
a possible cut in Bank Rate. Noting that the drawbacks to such a move as
against a hike in QE hadn’t changed since the last discussion in June,
the Committee conceded that the FLS could be a game changer.
“…the impact of the FLS and other policy initiatives might, in
time, alter the Committee’s assessment of the effectiveness of such a
rate reduction. The Committee could review this option again when the
impact of the FLS and other policy initiatives was more readily
apparent; that was unlikely to be for several months”.
BOE officials have tended to steer away from a rate cut below 0.5%
on the grounds that this would lead to a counterproductive compression
of bank lending margins. Should the FLS succeed in changing the
banks’ cost structure a cut in Bank Rate could add to the BOE’s panoply
of self-reinforcing stimulus measures.
Zero Bank Rate may not be the last policy shibboleth to be broken
by the BOE before this crisis is over.
–London Newsroom: +4420 7862 7492; email: dthomas@marketnews.com
[TOPICS: M$$BE$]
