LONDON (MNI), Oct 17 – Some members of the Bank of England’s
Monetary Policy Committee have dropped the mantra that quantitative
easing works and have gone public with their doubts over whether more QE
would be effective.
In the wake of the publication of the October MPC minutes, which
showed the MPC divided over the likelihood of further QE and with some
members questioning whether it would bolster the real economy, analysts
said that the long anticipated extension of QE in November is not a done
deal.
While the minutes don’t name names, BOE Chief Economist Spencer
Dale and MPC member Ben Broadbent have been at the forefront is setting
out the QE skeptics’ case.
Both have highlighted the supply side weaknesses in the UK economy
and have been supportive of the BOE venture into credit easing through
the Funding for Lending Scheme.
Their arguments dovetail. Broadbent’s recent work cited the
inefficiencies within the post credit crunch banking sector in
allocating, and re-allocating, capital as a key factor behind the
exceptional weakness in UK productivity growth.
In a credit constrained economy, with supply side weaknesses and
inflation running above target, pumping in more stimulus through QE may
be a mistake, while initiatives to tackle the credit problems should be
encouraged.
The October MPC minutes contained many echoes of Broadbent and
Dale’s views.
The minutes noted inflation is still above target and “was
likely to remain so in the near term” with the level of inflation
dependent in part on whether there would be a recovery in productivity.
One view was that weak demand, and companies’ associated reluctance
to invest, was curbing productivity growth which would recover as
demand picked up.
The alternative view on productivity weakness contained in the
minutes was a reiteration of the one spelled out by Broadbent in his
speech in Durham on September 12.
This is that “constraints on the supply of credit from the banking
system were the dominant factor – either by preventing some companies
from investing in productive technology or by hindering the reallocation
of resources towards more productive companies and sectors.”
“In that case, more buoyant demand in itself might not be
sufficient to bring supply back on stream without a material improvement
in credit conditions,” the minutes added.
The FLS is designed to tackle the credit problems, by providing UK
banks with an incentive to boost lending, while further QE may fail to
provide much stimulus to the real economy and could be an inappropriate
response to weak growth.
The MPC is split over the effectiveness of more QE.
“Some members felt that there was still considerable scope for
asset purchases to provide further stimulus,” the minutes said.
“Other members, while acknowledging that asset purchases had the
scope to lower long-term yields further, questioned the magnitude of the
impact that lower long-term yields on corporate debt and equity would
have on the broader economy at the present juncture,” they added.
Dale’s “Limits of Monetary Policy” speech in Dublin on Sep 8
highlighted the costs of QE, as well as the benefits, and he has warned
against the “Pavlovian” response of calling for more stimulus every time
the growth numbers disappointed.
“Injecting additional monetary stimulus when we observe weak output
might not be the right thing to do,” Dale said.
One time when it would be wrong to add stimulus, he said, was “if
we thought weakness in both demand and supply were being driven by some
other factor, perhaps related to our impaired financial system and the
sustained period of tight credit conditions.”
That scenario is precisely the one set out by Broadbent, and both
of them voted against the current tranche of stg50 billion of further QE
back in July.
While those two look set to vote against more QE in November they
could also be joined by Martin Weale.
“I am concerned about the stickiness of inflation,” Weale said in
an interview with the Daily Mail on October 11.
“It is certainly not self-evident to me in the light of the
apparent stickiness of inflation that substantial extra support for the
economy would be compatible with the inflation target,” he added.
The latest round of utility price hikes, which will come into
effect in Q4, are much larger than the MPC predicted back in August, and
only reinforces the view that inflation is not coming back to target
near term and is once again proving stickier than the committee
expected.
In the August Inflation Report the forecast was for gas and
electricity price hikes averaging 2.5% but the range so far has been 6
to 9%.
At Tuesday’s CPI data briefing a National Statistics spokesman said
that the utility hikes looked similar to last year when 0.45 percentage
point was added to inflation.
George Buckley, chief UK economist at Deutsche Bank, calculates
that on the BOE’s August assumption the utility hikes would have added
only 0.14 percentage point inflation and his estimate is this round will
add 0.41 pp.
When the MPC reruns its forecasts in November, it will have to add
some 0.3 pp to near term inflation as a result of the utility hikes
alone, and it was previously estimating CPI would average 2.19% in Q4.
The MPC vote looks highly likely to be split in November, but the
majority could still come down on the side of further stimulus.
It’s all looking at lot closer call than it was only recently, and
even analysts in the majority camp predicing more QE in November are
admitting to doubts that the MPC will sanction further asset purchases.
As Alan Clarke, director fixed income strategy at Scotiabank noted,
the minutes show that some members of the MPC are “falling out of love
with QE.”
–London newsroom: 4420 7862 7491; email: drobinson@marketnews.com
[TOPICS: M$$BE$]