LONDON (MNI), Aug 16 – The Bank of England’s Monetary Policy
Committee is exploring ways of injecting fresh stimulus into the economy
but members have little enthusiasm for a cut in Bank Rate.
Markets continue to price in a substantial, if diminished, chance
of a Bank Rate cut before year end but the public comments from MPC
members on the issue have all been skeptical and further credit easing
steps and more quantitative easing are the preferred options.
Using sterling overnight rates, SONIA, money markets are placing
around a 40% chance on a 25-basis-point cut this year, down from around
90% early this month. Some economists, however, believe even the 40%
probability over estimates the chance of a cut, with no evidence of any
MPC member being well disposed towards one.
MPC members have stuck to the line that, while they don’t rule out
a Bank Rate cut, QE is more effective. They have said the BOE’s flagship
credit easing measure, the Funding for Lending Scheme, could tilt the
scales in favour of a cut but none of them have expressed any confidence
that it actually will.
“If we thought (rate cuts) would add more stimulus we would do it
but asset purchase through quantitative easing is a more powerful way of
aiding the economy … but we’re keeping that under review,” BOE
Executive Director Markets Paul Fisher told the Belfast Telegraph this
week.
BOE Governor Mervyn King was highly skeptical about the benefits of
a Bank Rate cut at the August 8 post Inflation Report press conference.
Asked if a Bank Rate cut would be counter-productive, as it would
hurt lenders, King replied “I think we would agree with you that it is
likely to be more counter productive than not at this stage.”
He argued that a quarter point rate cut was “neither here nor
there.”
“Another quarter point on Bank Rate is not going to be the
difference between having a recovery, or not having a recovery. So I
think we’re in different territory and looking for instruments that will
try to get us out of the present difficulties. I don’t think a Bank Rate
change is going to be a big enough one to make any significant
difference,” King said.
Earlier comments from MPC members Ben Broadbent and David Miles on
the subject have also highlighted the disadvantages of a rate cut.
Back in late May Broadbent talked to Bloomberg about the “less
desirable effects” of a Bank Rate cut in terms of compression of margins
and “that may, in turn, encourage them to supply less credit.”
Even after the FLS was unveiled Miles told the Treasury Select
Committee, “I think there is at least a question mark about whether it
(a rate cut) would do any good.”
Analysts looking for a cut in Bank Rate point to a supportive line
in the minutes of the July meeting of the MPC:
“The impact of the FLS and other policy initiatives might, in time,
alter the Committee’s assessment of the effectiveness of … a rate
reduction.”
That, however, is very far from an assertion it will, or is even
likely to tilt the scales, and there are plenty of economists who
believe it won’t.
On Wednesday of this week the BOE published the numerical
parameters underpinning the August Inflation Report and these
clearly left the door open to further stimulus.
For calendar year 2012 the implied growth forecast, on MNI
calculations, was near as makes no difference flat, at 0.04%, rising to
just 1.77% in 2013. The forecasts do, however, show a strong rebound in
Q3, with a 1.02% increase on the quarter, before growth runs near flat
again in Q4 (-0.08% on the quarter).
The modal, market rate based inflation forecast showed CPI at 1.68%
two years ahead, with a 58% chance of it being at, or below, the 2%
target and an almost one-in-three probability of it being below 1%.
However, as Philip Rush, economist at Nomura points out, the
market rate forecast was based on a 25-basis-point Bank Rate cut and the
flat rate forecast showed CPI at 1.64% two years out. A 25 basis point
rate cut, therefore, adds just 0.4 basis points to CPI – supporting
King’s view it is really neither here nor there in the big picture.
Most analysts are predicting further QE in November, when the
current Stg50 billion tranche runs out. This could, however, be
presentationally tricky for the MPC if growth is picking up and
inflation is still running above target. The latter is a plausible
scenario, with the July CPI outturn coming in at a higher than expected
2.6%, up from 2.4% in June.
BOE Deputy Governor Charles Bean, however, made clear in an
interview this week with the BusinessDesk.com that the July CPI outturn
was not a game changer.
“The number was not significantly higher than we were expecting,”
he said, adding, “I don’t think that number is likely to change the big
picture which is that inflation is likely to continue to edge down
during the second half of this year and into next year.”
The question is increasingly one of how the BOE delivers more
stimulus rather than whether it will.
The FLS only became active at the start of August and the minutes
of this month’s meeting showed the MPC already mulling further stimulus.
“For most members, the decision this month was relatively
straightforward. Over the coming months, the Committee could take stock
of the impact of the FLS and the implications this had for other
potential policy options,” they said.
“For some members the decision was nevertheless more finely
balanced, since a good case could be made at this meeting for more asset
purchases,” the minutes said.
As economists point out, the “potential policy options” could
cover some options which are not directly under the MPC’s control, such
as easing bank capital requirements to, say, increase the supply of
higher loan-to-value mortgages or refining or extending the FLS itself.
With the BOE taking effective control of bank regulation and
macro-prudential policy, as it is working hand-in-glove with current
regulator the Financial Services Authority before formally assuming
power, and with the FLS backed by the Treasury, the central bank has
more options than ever before to fine tune the stimulus it provides.
A Bank Rate cut may be at the bottom of the policy toolkit bag.
–London newsroom 0044 20 7862 7491; email: drobinson@marketnews.com
[TOPICS: M$$BE$]