Last night the G-20 summit ended and the world’s leaders started to depart from the Mexican tourist destination of Los Cabos. As ever they issued a communique and I would like to draw your attention to this sentence in it which covers the Euro.
We welcome the significant actions taken since the last summit by the euro area to support growth, ensure financial stability and promote fiscal responsibility as a contribution to the G20 framework for strong, sustainable and balanced growth.
If we look at what the euro area had done since the last G-20 summit we can see that it had in fact done nothing of the sort! Economic growth is expected to be negative possibly substantially so in the second quarter of 2012 and rather than being stable Greece’s banks have been bailed out yet again and Spain’s banks are going to be the recipients of a 100bn euro rescue package! I am reminded again of the song by PM Dawn.
Reality was once a friend of mine
Still at least the weather was good as I understand that the BBC’s Economics Editor Stephanie Flanders got sunburn on her toes.
The likelihood of more Quantitative Easing in the UK
The UK Monetary Policy Committee Minutes
This morning has seen the release of the latest minutes and they contain quite a lot of food for thought. Let us start with the vote on further Quantitative Easing.
Regarding the stock of asset purchases, five members of the Committee (Charles Bean, Paul Tucker, Ben Broadbent, Spencer Dale and Martin Weale) voted in favour of the proposition. Four members of the Committee voted against the proposition. The Governor, David Miles and Adam Posen preferred to increase the size of the asset purchase programme by £50 billion to a total of £375 billion. Paul Fisher preferred to increase the size of the asset purchase programme by £25 billion to a total of £350 billion.
So the vote at the beginning of this month had been just about as tight as it could be with the no vote only just prevailing 5-4. And we further see that some of the five were not against more QE full stop but were in fact in favour of a delay.
While acknowledging that further stimulus was likely to become warranted at some point, most members noted that there were several key events occurring over the coming weeks that could have a material bearing on the situation in the euro area and that there was merit in waiting to see how matters evolved there before the MPC reached a conclusion on whether to add any further monetary stimulus.
So I think that at the next meeting of the Monetary Policy Committee on the 4th and 5th of July we are now extremely likely to see a new burst of Quantitative Easing and £50 billion seems to be the likely amount. This would take the total to £375 billion. As they were previously willing to countenance more QE with inflation of double its target then they will be further encouraged by yesterday’s figures.
CPI annual inflation stands at 2.8 per cent in May 2012
For those interested in the significance of the Governor of the Bank of England being outvoted then if my memory serves me right that has happened before but only once.
The Bank of England has its own “Reality was once a friend of mine” moment
We get told in the MPC minutes that QE achieves this and the emphasis is mine.
The Committee agreed that asset purchases remained an effective tool for lowering a range of market interest rates, supporting asset prices and so nominal demand.
But when we get to the real economy it sees this.
(a) rise in interest rate spreads on mortgages and loans to small and medium-sized businesses in recent months, despite the extension of the asset purchase programme in February.
Tucked in their is an admittal that it does not and has not worked for the real economy and yet four members of the Monetary Policy Committee voted for more of it!
A Reduction in interest rates was debated too
The Committee first considered the merits of a reduction in Bank Rate
We then see something that I consider to be very revealing. The paragraph discussing this matter only discusses the impact of such a move on the banking sector. The real economy does not get a mention!
I do however note that they seem to be slowly becoming aware of an issue I raised back when I started this blog which is the gap between official (i.e base rate) and unofficial interest-rates.
On the other hand, since early 2009, retail deposit rates had increased somewhat
I would also like you to look back a paragraph or two to the section where rising mortgage and corporate borrowing rates are also mentioned. Is it rude to point out here that Quantitative Easing of which we have had £325 billion so far is supposed to do this?
That lowers longer-term borrowing costs
Perhaps up is the new down. Or “lowers” needs to go into my financial lexicon for these times.
There was also a discussion about bank reserves held at the Bank of England
The Committee also discussed the possibility of changing the remuneration structure on banks’ reserves at the Bank of England by paying Bank Rate on only a proportion of those reserves.
This is a relatively technical issue. There has been a debate on this subject for a while now with some arguing that not paying interest on bank reserves held at the central bank would have a powerful economic effect. In essence their argument is that the banks would then take the money away from the central bank and use it for lending which would help to stimulate the economy.
Actually yet again the MPC only seemed concerned about the effect of this on the banks and the money markets and not the real economy. You might be forgiven for thinking that there is a trend and a theme in evidence here!
For those with concerns about the real economy I am in the camp who doubt the effectiveness of such a move and let me give you three reasons for this.
- Changing bank reserve requirements rarely works as well in practice as its proponents have previously claimed.
- We are in an era where negative interest-rates are spreading and these do not seem to have deterred investors. For example Denmark issued some two-year bonds yesterday at a yield of -0.08%. So zero interest rates may not be a disincentive in practice.
- As we have a broken monetary transmission mechanism even if the banks take the money away from the central bank there is no real evidence they would lend it out as opposed to say buying UK government bonds. Recent history suggests that the latter is more likely than the former.
There seems to be more than a whiff of panic about this month’s minutes from the MPC. Measures which they had previously not even considered were discussed such as a further cut in base rates. As 0.5% was supposed to be an emergency rate I would be interested in readers thoughts as to what a 0.25% or even a zero interest rate would be called!?
There seems little doubt that the UK can now expect more Quantitative Easing even though as I have noted above even the MPC seem now to realise that its effects have failed to spread to the real economy. And interestingly they may now be coming slowly around to my view that the UK economy cannot recover fully until our banking sector is reformed.
It was possible that the impaired UK banking system, coupled with a heightened perception of risk stemming from the euro area, had been a larger impediment to the recovery of both demand and potential supply capacity than previously thought likely: the weakness of lending, housing market transactions, business investment and productivity growth were all possible symptoms of that.
I hope to have the opportunity to press that matter as I have applied for the vacancy that currently exists on the MPC. I will let you know how I get on although it was not entirely reassuring that one of the alternatives on the drop down box was “invited to apply”. Er by whom? And what about the implications for central bank independence?
As I put the history of this blog forward as part of my evidence of my suitability for the role then it is possible that today’s article is being read on that basis. If so here is my message via Sheryl Crow.
I think a change,This article was written by Shaun Richards and originally published on Mindful Money under the title: The UK Monetary Policy Committee seems more worried about the banks than the real economy
(A change would do you good)
Would do you good.
(A change would do you good)
Tags: economic growth , economic recovery , European Monetary Union , eurozone , financial crisis , fiscal stimulus , G20 , G20 summit , Greece , monetary policy committee , quantitative easing , regulation , sovereign debt , Spain , Spain's banks , Spanish banks , summit , UK