Bank of England Didn’t Change QE but Released a Detailed Statement Anyway

February 7, 2013

The Monetary Policy Committee almost never gives immediate information on meeting discussions unless it has changed policy.  This meeting was one of the extremely few exceptions, which in itself could be the biggest story.

Rather detailed remarks in a released statement conclude

The Committee discussed the appropriate policy response to the combination of the weakness in the economy and the prospect of a further prolonged period of above-target inflation. It agreed that, as long as domestic cost and price pressures remained consistent with inflation returning to the target in the medium term, it was appropriate to look through the temporary, albeit protracted, period of above-target inflation. Attempting to bring inflation back to target sooner by removing the current policy stimulus more quickly than currently anticipated by financial markets would risk derailing the recovery and undershooting the inflation target in the medium term. The MPC’s remit is to deliver price stability, but to do so in a way that avoids undesirable volatility in output. The Committee judged that its policy stance was fully consistent with that remit. The Committee agreed that it stood ready to provide additional monetary stimulus if warranted by the outlook for growth and inflation.

Such language seems intended to dissuade markets from anticipating a rate hike happening sooner than heretofore imagined.  Earlier in the statement, a near term rise in inflation is predicted, and officials state that inflation is unlikely to go below the 2% target during the policy horizon.  The final sentence above even leaves the door open for a possible future expansion of the GBP 375 billion limit on the asset purchase program, that is to say the bank’s quantitative easing which was raised last in July 2012.  That limit was met by November.

By the same token, it’s clear that officials are unprepared to ease additionally unless the outlook for growth deteriorates significantly.  The baseline view is that “the UK economy is set for a slow but sustained recovery in both demand and effective supply, aided by a further easing in credit conditions – supported by the Bank’s program of asset purchases and the Funding for Lending Scheme – and some improvement in the global environment. But the risks are weighted to the downside, not least because of the challenges facing the euro area.”

Mark Carney, who takes over as as governor of the Bank of England right after midyear, testified before British parliament earlier today and gave a strong endorsement to flexible inflation targeting as an effective framework for promoting medium-term price stability and anchoring expected inflation.  In his current capacity as Governor of the Bank of Canada, Carney has acquired a hawkish reputation, at least more so than Mervyn King, the present Bank of England governor.  British monetary policy is decided by a nine-person committee over which the governor presides but with just a single vote.  Individuality, rather than consensus building, is encouraged of the other eight members, each of whom has the same voting power as does the governor.

Copyright 2013, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.



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