LONDON (MNI) – The Bank of England’s Monetary Policy is not
pre-committed to more quantitative easing in February and the question
of how fast it can go in purchasing Gilts is just a side issue, MPC
member Ben Broadbent says.
Broadbent fiercely rejects the view that the “speed limit” on QE,
the assumption that if the BOE stepped up the pace of Gilt purchases, it
would create liquidity problems, has had any influence on his policy
decisions. He believes the MPC is free to announce as much QE as needed
to meet its inflation target without being distracted by concerns over
Gilt market supply.
While the big picture for the MPC is that output is stagnant and
that spare capacity in the economy is likely growing, Broadbent sees
some positive economic trends emerging over the course of 2012 which
make a pickup in the economy in the second half a “reasonable” forecast.
In addition, the European Central Bank’s recent actions appear to
have lowered downside risks for the UK economy.
Ever since the MPC sanctioned Stg75 billion of quantitative easing,
back in October, and said the asset purchases would take four months to
complete, analysts have viewed further QE in February as inevitable. The
current debate among analysts has centred on whether the MPC will
announce Stg50 billion, or Stg75 billion of QE, with the speed at which
the BOE can buy Gilts seen as a key factor in determining the amount of QE
the MPC will announce next month.
From Broadbent’s perspective, the way of looking at things is plain
wrong – there is no pre-commitment to more QE in February and the pace
the BOE can go on Gilt buying is irrelevant to the amount, if any, of QE
the committee will announce.
“I can’t speak for everybody (on the MPC) but certainly, as far as
I am concerned, I voted in October, and indeed have voted every month,
about the stock of asset purchases,” Broadbent said in an interview with
Market News International.
“It is irrelevant to me how quickly you may buy them. I could have
voted for any stock at any point,” he adds.
After the October announcement, the MPC voted for no change in its
three subsequent meetings.
Broadbent is scornful of the view the MPC has been simply biding
its time until it completes the current round of asset purchases before
inevitably launching the next round of QE in February.
“If we had wanted to vote for more QE, as measured by the stock,
and that is how we tend to understand its effects, then I would have
done that in October and, indeed, the Committee could have done it again
in November or December,” he says.
Back in October, “I voted for Stg75 (billion of QE) because I
thought Stg75 was right,” he adds.
“If someone had said we can do it in two weeks, or someone had
said we can do it in six months, it wouldn’t have had any bearing on
what I voted for,” Broadbent said.
Market practicalities have led the BOE to buying the Gilts at the
current pace of Stg5.1 billion a week through its reverse auctions. The
October QE decision and the speed of purchases has left no “unfinished
business” for the MPC in February.
“I am free, have been free, at the subsequent meetings and will be
free in the one in February, to vote as I see fit,” Broadbent says.
There has been a theoretical debate about whether QE works through
stock or flow of purchases. Broadbent is very firmly in the stock camp –
and it is the orthodox view at the central bank.
“The basic economics would tell you it is a stock issue. The idea
that it is a flow is slightly odd in forward-looking markets,” he says.
“If I tell you I am definitely going to buy a certain amount,
would it really affect the price if I bought it over one or two months?
I would expect the price to reflect the amount of gilts that the central
bank owns relative to the private sector,” he says.
Some of Broadbent’s colleagues on the MPC may not be so sanguine
about the idea of changing the amount of Gilt purchases before a round
is completed. There are arguments, for example, over the cost of policy
reversal.
“Now, it may be that for some members of the Committee that also
influenced their decision on the vote on the stock. That doesn’t mean
that they believe that it is the flow that influences the economy. It
may just be that they are uncomfortable with voting for a change in the
stock when the last change hasn’t been fully completed,” Broadbent says.
In February the MPC will have a new set of growth and inflation
forecasts. The previous, November ones, showed inflation heading back
below the 2.0% target, ending up at some 1.3% two years ahead on the
central forecast.
The sizeable projected inflation undershoot, and the belief the
February Inflation Report projections will be similar, have reinforced
the view more QE in February is inevitable. Broadbent says the MPC is
not in the business of fine-tuning policy and the balance of risks
justified the October decision.
“We are dealing in coarse, rather than fine-tuning, because it is
probably, at the margin, harder to say what the impact of any policy
change in the instrument (QE) is, because we are less familiar with the
instrument,” he says.
“Of course the new (February) forecasts will give you some
framework for making that decision. But I certainly didn’t take the
decision in October 1) that was constrained by the flow rate and 2) that
made me think I was committing myself to anything, for any other reason,
in February,” Broadbent says.
Broadbent, who joined the MPC last year having worked as an
economist at Goldman Sachs, thinks some of his former counterparts in
the City should spend less time fretting about how fast the BOE can buy
Gilts, and get back to looking at the economic issues.
“The proper business of the analysts on the outside is to
understand what is going on in the economy and to understand our
interpretation of it,” he says.
“I see this other thing (the focus on the pace of Gilt purchases)
as, not wholly irrelevant, but kind of a distraction from that,” he
says.
And if the worst comes to the worst and the Eurozone crisis really
intensifies, there will be more than enough Gilts out there for the MPC
to announce a lot more QE – even if it will take time to buy them.
“As far as the stock is concerned, the Bank of England has bought
fewer gilts over the last … getting on for three years than the
government has issued over that period,” he says.
Please see Part 2 of this interview for Broadbent’s views on the
broader economic outlook.
–London newsroom: 4420 7 862 7491; email:
drobinso@marketnews.com/dthomas@marketnews.com
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