The Bank of England’s rate-setters should vote to pump an additional £25
billion to £50 billion into the economy at their meeting today, The
Times Monetary Policy Committee recommends.
Seven of the nine committee members believe that the Government should expand
its £175 billion quantitative easing (QE) programme, which aims to stimulate
the economy by printing money and using it to buy bonds from financial
institutions.
Four members want a £25 billion increase in QE, one called for a £30 billion
rise and two for a £50 billion jump. The other two members voted for no
change.
Last month, the panel unanimously voted to maintain QE at its existing level
amid signs that the economy was improving and would probably have returned
to growth in the third quarter. The Office for National Statistics has since
published its initial estimate for third-quarter gross domestic product
(GDP) — a 0.4 per cent decline in output over the period.
Geoffrey Dicks, chief economist at Novus Capital Markets, said that QE should
be raised by £50 billion. “Despite record low interest rates, a huge QE
programme, easy fiscal policy and a competitive exchange rate, the UK
recovery is lagging behind all the other major economies. This implies that
a further monetary stimulus is needed,” he said.
However, Sir Steve Robson, former Permanent Secretary to the Treasury,
advocates a different approach. He is concerned that inflation will be
bumping up against the Bank’s 2 per cent target by the middle of next year
and thinks that QE should be left as it is. “QE continues to have no
significant effect, other than the adverse one of driving up prices and so
creating the pre-conditions to what could become another serious problem,”
he said.
For Martin Weale, director of the National Institute of Economic and Social
Research and one of The Times MPC members advocating a £25 billion
increase, inflation is less of a concern. Mr Weale said: “I would never say
that fears of inflation are groundless but at the moment the concern is much
more about maintaining demand than about the risks of excess demand.”
The Times MPC panel was almost unanimous in its recommendation that the
key interest rate should stay at its historically low level of 0.5 per cent.
Anatole Kaletsky, editor at large and chief economics commentator of The
Times, was the only member to advocate a change in the base rate,
arguing that it should be halved, to 0.25 per cent.
“It is now clear that continuing to remunerate banks at 0.5 per cent simply
encouraged them to hoard reserves and was a mistake ... The needless subsidy
provided to commercial banks by remunerating their reserve holdings should
stop,” he said.
The panel steered clear of whether the Bank of England should reduce the rate
of interest that the Bank of England pays on money deposited by commercial
banks, at present 0.5 per cent. Charles Goodhart, a professor at the London
School of Economics and a former member of the Bank’s MPC, said that he
would cut the interest rate to zero “to encourage banks to expand their
balance sheets”. He added: “It is now or never to use this potential
instrument.”
Economists hope that Britain will emerge from recession this quarter, although
they believe that it will be a fragile recovery. Moreover, there are
concerns that the economy could fall into decline again next year once the
impact of the Government’s economic stimulus wanes.
The verdicts
Bronwyn Curtis, head of Global Research, HSBC Bank:
If the monetary stance is changed this month, it should be done using QE
rather than the Bank Rate. Given the various headwinds facing the economy
going forward, I would not envisage a change in the Bank Rate before the
middle of 2010.
The uncertainty about the future path of the UK economy has risen. Economic
indicators are mixed with Q3 GDP considerably weaker than expected and the
underlying data suggests that businesses are still de-stocking. The more
positive data includes the purchasing managers indices and house prices.
Credit availability for corporate loans shows some improvement, but credit
availability for households fell and there are still questions over the
strength of the recovery in developed markets.
The question is how much impact QE is having over and above the fall in
sterling short term rates. That’s hard to measure, but we do know that
without it, the yield curve would be steeper and confidence lower. Given the
fragility of the economy it would seem prudent to increase QE by another £25
billion and perhaps go for a more direct approach by aiming it at the
corporate credit markets rather than gilts.
The decision about when to stop, or even start reversing, the policy stimulus
will be determined by the strength of the headwinds. The cumulative effect
of multiple regulatory initiatives on the banks which will adversely impact
their ability to lend combined with the need to improve the public finances
means any recovery will be lacklustre. Talking about how an exit strategy
might be managed is about all they should be doing at this time.
Rupert Pennant-Rea, chairman, Henderson Group and former deputy governor of
the Bank of England:
Despite the unexpected GDP decline in Q3, the economy is still likely to make
a weak and uneven recovery from now on. In the circumstances, it is too
early for the MPC to start signalling a possible rise in base rates, and I
could easily imagine no change before mid-2010.
The judgment on QE is more difficult. I see no merit in the MPC closing the
door to a further increase, though at this stage I don’t think an increase
is necessary. If circumstances require more QE in due course, it seems
unlikely to be more than £25 billion.
Since the exit strategy is a subject that seems to preoccupy markets and the
media, it is surely right for the MPC to steer the debate in a direction
that it regards as useful or anyway not damaging. What would be harmful
would be to say nothing and then suddenly announce that the exit had begun.
And I do think it would be helpful for the MPC to emphasise that the acid
test is whether low base rates and QE have created enough monetary expansion
to support a recovery in demand that will take the economy back to its
sustainable growth path. Once that happens, the exit can begin.
Martin Weale, director of the National Institute of Economic and Social
Research:
I think that there should be an additional £25bn of QE over and above what is
already planned, with the general point that the need for the Bank to do
something to support private sector borrowing is as acute as ever. The
recent GDP figures re-inforce this need. I do not think that we need worry
about an exit strategy at the moment. I would never say that fears of
inflation are groundless, but at the moment the concern is much more about
maintaining demand than about the risks of excess demand. The argument that
monetary expansion is bound to lead to inflation has always been weak and is
particularly so at the moment. The one thing we cannot do is to establish
the correct time for any tightening. Policy needs to respond to events as
they unfold.
My expectation is that interest rates will start to rise in the middle of next
year, but policy will, of course, remain very expansionary even as this
process is underway.
Sir Steve Robson, former second permanent secretary to the Treasury:
In 2010 growth will continue to be supressed by the constraints that levels of
debt will be imposing on consummers, the Government and many companies.
Inflation seems likely to be challenging the Bank's target by mid year given
the commodity and tax price increases that are now in the pipeline. In these
circumstances the Bank may be forced to start pushing rates up if only to
preserve confidence in sterling.
If they hope to remain in cointrol of events rather than swept along by them,
the Bank and the Government need to give clear recognition In the Autumn
Statement to these problems and indicate in broad terms how they intend to
address them.
Right now there are two immediate issues. First to bring a halt to QE. It
continues to have no significant effect other than the adverse one of
driving up asset prices and so creating the pre-conditions to what could
become another serious problem.
Second, to provide credit to those companies who are able to borrow but who do
not have access to the capital markets. The Bank needs to radically revise
its CP programme rather than, as it intends, close it down. They managed to
devise a scheme which had the right objective but was implemented in a way
which made impossible for companies to use.
Sir Alan Budd, former chief economic advisor to Treasury and former member
of the BoE's MPC:
I think that the interest rate should be unchanged.
I think that there should be further QE of £25bn over the next three months.
I expect this to be the end of QE but it leaves the MPC with the freedom to
go further if the economic data are unexpectedly weak.
We cannot expect the MPC to tell us when it plans to start removing the
current highly stimulatory policy settings. That will depend on economic
developments. We know that it may choose to start raising interest rates
before it starts selling assets back to the markets. Some discussion of
what considerations will guide its choice between the two techniques would
be interesting and helpful.
Charles Goodhart, professor at the London School of Economics and former
member of the BoE's MPC:
Let us start with the easy part. Base rates will, and should, remain at their
rock bottom level, until they can be reviewed in the light of the
post-election Budget next August.
What to do with QE is far more difficult. QE has helped to revive financial
markets, but has not done much to expand bank lending, the monetary
aggregates or the real economy. Whilst the recovery in financial markets,
and the depreciation of the exchange rate, have been welcome so far, one can
have too much of a good thing. So I would pause the purchase of gilts, but
continue, and even expand the purchase of private sector assets, (which so
far has been comparatively small in amount). Nevertheless I would ask for
permission from the Chancellor to purchase more gilts, while saying that I
did not intend currently to use them, partly as a precaution against either
a further weakening of the economy or a collapse in the gilts market.
Moreover, I would now cut the interest rate paid on bank deposits at the Bank
of England, beyond some quite generous per bank ratio, to zero, to encourage
banks to expand their balance sheets. It is now, or never, to use this
potential instrument.
It is never too early to start thinking about exit strategies. It may,
however, be too early to start talking about them in public, particularly
since the nature of the exit will depend critically on the fiscal component.
Anatole Kaletsky, editor at large and chief economics commentator, The
Times:
I vote to reduce Bank rate to increase QE by up to £50bn and reduce Bank Rate
ot 0.25%. With GDP still contracting there is no reason to stop QE although
the pace and final amount shoudl be reconsoidered at each MPC meeting.
The increase of £50bn is a ceiling and the Bank could stiopo buiying gilts at
any point if cricumstances changed.
Regarding my proposal to cut Bank Rate, it is now clear that continuing to
remunerate banks at 0.5% simply encouraged banks to hoard reserves and was a
mistake. I argued at the time that Bank rate shoudl have been cut all the
way to zero of 0.25% but the Bank insisted there wwere technical reasons for
maintaining a positive Bank rate and this would not discourage bank lending
to the private sector. This argument has now been proved wrong and the
needless subsidy provided to commerci8al banks by remunerating their reserve
holdings should stop.
Geoffrey Dicks, chief economist, Novus Capital Markets:
No change in rates; another £50bn increase in QE
The decline in GDP in the third quarter was a shock, less because there was
another small fall, more because it was broad-based with output declining in
all the main sectors of the economy. The numbers may well be revised higher
in due course but the message will not alter. Despite record low interest
rates, a huge QE programme, easy fiscal policy and a competitive exchange
rate, the UK recovery is lagging behind all the other major economies.
More up-to-date survey and anecdotal evidence is more buoyant and points to
some recovery in activity. Even so, on current trends, the amount of spare
capacity in the economy is rising, which implies that inflationary pressures
will diminish still further.
When the MPC runs all of this through its November forecast, it will conclude
that inflation is on track to undershoot the 2% target. This implies that
some further monetary stimulus is needed. After its last two forecast
rounds, the MPC judged that a £50bn increase in QE was warranted. It should
signal more of the same this month.
Sushil Wadhwani, former external member of the Bank's MPC
“The MPC should announce a modest extension of the asset purchase programme
of perhaps £30bn over 3 months.
Although I believe that the recovery will surprise on the upside in the coming
quarters, the depth of the recession seems to have been greater than I had
previously thought.
Moreover, any effects of quantitative easing on the economy have come through
a lower exchange rate and gilt yields. An unexpected pause could have
surprisingly large effects on market conditions where there are growing
fears of premature exits from quantitative easing”.
Your Comments
Order By: