Quantitative Easing British Style

March 19, 2009

The Monetary Policy Committee meeting of March 4-5th advanced British monetary policy far down the road of quantitative easing.  By a 9-0 vote, the Bank of England

  • Halved its Bank Rate to 0.5%.
  • Agreed to finance Gbp 75 billion of asset purchases by creating central bank reserves, that is printing money.  This will be done within three months, and the scale and timing of the purchases are to be reviewed at subsequent policy meetings.
  • Agreed that the purchases of private sector assets under the Asset Purchase Facility will henceforth be financed also by using central bank reserves rather than Treasury Bills.
  • Agreed that if purchases of private sector assets fell short of the target of Gbp 75 billion, the Bank of England would buy up gilts to fulfill the overall planned quantity of purchases.

Officials arrived at the above set of actions after concluding that a “substantial risk remains that inflation would undershoot the target in the medium term.”   Published minutes from the meeting provide the best view I’ve seen so far into the complexities of credit policy oriented around the stock of money rather than its price.  How does one compensate for a compromised mechanism of policy transmission?  What risks are created by near-zero interest rates sustained for a long time?  What will sellers of assets to the Bank of England do after accepting highly liquid, low-yielding assets and how does one get from that state of portfolio disequilibrium to a desired boost to nominal aggregate spending?  How insufficient would nominal spending growth be from its long-term trend if the central bank did not undertake these operations, and what amount of outright asset purchases is needed to close that shortfall?  In light of huge uncertainty surrounding the impact of quantitative easing, should the central bank begin with slow, incremental steps to monitor the economy’s response or attack the problem aggressively from the start?  What kinds of asset purchases would give policymakers the biggest bang for their efforts?  What time frame should be allowed for completing the task?

These issues were addressed carefully by policymakers and have universal relevance for any central banks already undertaking a quantity approach to monetary stimulus, as well as ones that have resisted that plunge so far but that may reach a point where abstaining no longer becomes a viable option.

In further news today specific to the Bank of England, Chancellor of the Exchequer Darling (the title for the finance minister) announced that the policy-making committee’s most dovish and hawkish members would be stepping down this summer.  David Blanchflower, who cast 18 dissents for a more dovish stance than the majority since 2006, will be replaced in June by David Miles, who comes to the central bank from Morgan Stanley and made a reputation as an expert on financial market matters.  Blanchflower’s specialty is labor economics, and he correctly predicted the current labor market implosion last year, while his colleagues were maintain a much more benign prognosis.  One of them, Tim Besley, leaves the central bank this August.  He voted for rate hikes of 25 basis points in October 2006 (his rookie meeting as a policymaker),  February 2007, April 2007 and June 2007 when each time the majority settled on no change in rates. He also dissented against the central bank’s third rate cut in April 2008 by voting for no change.  At that meeting, Blanchflower had sought a cut of 50 bps, and the majority settled on a reduction of 25 basis points.  Most controversially, Besley wanted rate hikes of 25 bps at meetings in both July and August 2008 after the U.K. had already entered the recession of the century.  At each of those meetings, Blanchflower urged a rate cut, but the majority ill-advisedly took no action, perhaps because of the countervailing influence of the hawkish Mr. Besley.

It will take some time to see how the ideological balance at the Bank of England shifts after this summer.  On paper, the departure of Besley and Blanchflower should cancel out, but such a conclusion only rests on their individual voting records.  What’s most important on any committee, whether it be at a central bank, high court or Board of Directors, is the influence of certain members on the thinking of others.  Was Besley or Blanchflower more persuasive among his peers?  All one knows is that technically proficient deciders are not necessarily the most influential people in group dynamics.

Copyright 2009 Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.



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