Carney to spurn radical QE
George Osborne is demanding monetary activism from the Bank of England to speed a fragile recovery, but its new boss Mark Carney is unlikely to start a revolution on Threadneedle Street.
|Ross Walker, Senior UK Economist at RBS|
Expect the new governor to introduce a more transparent communications strategy, including clearer guidance on the trigger points for a tightening of policy. But don’t hold out for more radical QE-financed purchases of private loans and similar innovations. It is time to end some of the more unrealistic expectations heaped upon Carney. There are good reasons to believe we will see the return of ‘boring’ monetary policy under the Canadian, besides the fact that the BoE has already expended huge resources since 2008.
First, Carney is under far less pressure to act than anyone would have expected back in November 2012 when he was named as Mervyn King’s replacement.
While the recent cluster of surprisingly positive data does not suggest Britain is on the cusp of a robust, self-sustaining recovery, there is a clearer sense now that the sickly combination of anaemic growth and overshooting inflation is improving. Recent purchasing managers surveys for example suggest real GDP growth could pick up from an annualised 0.6 per cent in Q1 to around 1.6 per cent in Q2. Inflation is lower than expected. Suddenly his appointment looks far less of a poisoned chalice than when he was named.
The second reason to temper expectations is the stance of the institution he now leads.
The Treasury has revised the Monetary Policy Committee’s remit, allowing the Bank scope to pursue a looser monetary policy. Presumably George Osborne would not have chosen Carney had the former Bank of Canada chief not empathised with the Treasury’s activist position. But the incoming governor will have to carry a majority of the MPC’s nine independent members in voting for greater radicalism.
It seems unlikely he could garner sufficient support for some of the most radical options that have been touted. These include a Bank or Treasury purchase of private assets, such as securitised small business loans or mortgages, from commercial banks. A UK version of the US TARP programme is for some a logical extension of the existing QE-financed purchase of gilts and Bank of England lending to the financial sector. But up to now, the Bank has been much more sceptical, if not overtly hostile, to the idea.
Radical credit easing only becomes a realistic option once other ideas have been tried and the MPC are convinced the UK is suffering not from a lack of credit, but a blockage in the pipe delivering that credit to business.
The most immediate changes are therefore likely to be presentational. That means less hiding behind fan charts and more explicit detail on what would alter policy. As Bank of Canada governor, Carney pioneered the practice of ‘forward guidance’ – committing the bank to looser monetary policy until predetermined indicators had reached particular levels. In similar fashion the BoE could commit itself to maintaining its accommodative stance until unemployment fell below 6 per cent or until nominal GDP had exceeded 5 per cent for example.
The new approach would no doubt be presented as a significant development. Yes, it should be welcomed. But in practice, the real economic and financial implications would probably be more prosaic.
Carney’s other options look familiar.
Further quantitative easing is the most obvious solution should the BoE still judge general monetary conditions to be too tight. If Carney is as dovish as many believe him to be, and given the Treasury’s demands for monetary activism, then he would be expected to vote for additional gilt purchases at an early stage.
This could be supplemented by an interest rate cut or some form of support for commercial banks similar to the ECB’s LTRO programme. As far as interest rates are concerned however, the MPC so far seems fairly apathetic. No member of the committee has voted for a cut since the cost of borrowing was reduced to 0.5 per cent in March 2009. At the margin, the chances of a cut have inched forward with Carney’s arrival, but that is as much a reflection of uncertainty at his arrival as any indication the rest of the committee has warmed to the idea.
The truth of course, is that for all their confident predictions, few City pundits have any real idea how radical the new governor will be. If he does intend to make a bold early intervention it may come with the Bank’s publication of the inflation report on August 7. For now though, the new governor will thank the recent run of benign data for a bit of breathing space.
Perhaps only if the UK suffers an economic relapse or a fresh threat to its financial system will we see just how revolutionary Carney can be.
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