Just two weeks ago the outlook for BoE policy, in the near term at least, looked pretty boring. Having completed its latest slug of Gilt purchases in October last year, and having subsequently opted to leave its stock of asset purchases unchanged at £375bn, a deteriorating inflation outlook had been expected to see policy left on hold until the arrival of the new Governor, Mark Carney, in July.
But the release of the minutes of the MPC’s February meeting changed all of that. Not only did these show three members, including the current Governor, voting for an increase in asset purchases, but they also confirmed a change in emphasis by at least some members of the Committee towards a more explicitly “discretionary” approach to the inflation target – i.e. allowing inflation to diverge from its target for even extended periods to try and foster growth. And the immediate aftermath of the publication of the minutes saw a number of MPC members, including one of the Deputy Governors Paul Tucker, hint at their own support for further monetary stimulus. This had seen expectations mount that today’s meeting would see the MPC re-start its QE programme.
In the event, policy was left on hold. But in spite of today's decision, there seems little doubt that recent comments from MPC members are likely to prove just the start of what looks set to be a fundamental change at the Bank over coming months. Expectations had already been high that the arrival of a new Governor would see a major shake up at the Bank. Faced with an economy that has flatlined over recent years (it has grown just 0.7% since the current government took office in May 2010), Mark Carney had signalled an enthusiasm for exploring new policy options to try and boost growth, including potential changes to the BoE’s target. And, if reports in today’s Financial Times are to be believed, his call for a debate on the target may bear fruit even before he takes up his post. The Chancellor is reportedly looking at the possibility of changing the MPC’s remit when he presents his Budget on 20 March. The options under discussion are (a) relaxing the current target to allow more leeway for inflation to deviate from the target, (b) a dual mandate similar to the Fed’s, or (c) a nominal GDP target. Of the three options, the first looks most likely, and would effectively formalise the de facto position the MPC has increasingly adopted.
But any change in the target is, of course, only one part of the equation. Boosting growth is almost certainly going to require more innovative policies than simply more QE, the effectiveness of which has seemingly faded the longer time has gone on. At a very minimum, some form of forward guidance is likely to be introduced, committing the MPC to continued easing up until a target for growth (or something similar) is met. This is something that has already been advocated by Paul Fisher, one of the three members that voted for more QE in February, and was something Carney himself has already used, pre-committing the Bank of Canada to hold rates at 25bps for at least a year in 2009. Carney and others, meanwhile, have indicated that they would like to explore options to widen the range of assets it can purchase, perhaps to include commercial paper and corporate bonds among other things, something that Mervyn King has reportedly refused to even discuss in the past. And more wheezes like the Funding for Lending scheme (which has hardly proved a roaring success at boosting lending to date) can be expected in an attempt to free up the flow of credit in the economy.
But with the government signalling that it is not going to change tack on its policy of austerity, in spite of all the evidence of the damage it is wreaking on the economy’s growth prospects, the MPC is going to have a tough task if it really is going to get growth materially higher. So the MPC appears on the brink of a much more concerted effort to boost growth, with a relaxation in the Bank’s inflation target looking likely later this month and increasingly innovative policies to boost growth following Mark Carney’s arrival in July. And while that may not be good for sterling, which has already weakened significantly this year, it will at least provide a glimmer of hope that the UK can get itself out of the growth funk it has found itself in for the past five years.
Grant Lewis, Head of Research