Don’t Expect BoE Changes In UK Monetary Policy Soon
Given the unanimity of the Bank Of England’s decisions on the rate setting committee we’d do well not to expect any major changes in sterling monetary policy in the near future. Quite unlike both the Federal Reserve and the European Central Bank at present.
This makes sense as leaving aside Brexit for the moment there doesn’t seem to be anything wrong with the British economy that needs correcting.
The Actual Decisions
The Bank Rate is being held steady, so is the QE position:
At its meeting ending on 18 September 2019, the MPC voted unanimously to maintain Bank Rate at 0.75%. The Committee voted unanimously to maintain the stock of sterling non-financial investment-grade corporate bond purchases, financed by the issuance of central bank reserves, at £10 billion. The Committee also voted unanimously to maintain the stock of UK government bond purchases, financed by the issuance of central bank reserves, at £435 billion.
All three decisions were expected. So, no change in interest rates. And also no change in the position on quantitative easing which is what the other two points are about.
Unlike the ECB the BoE never did really move into corporate bonds in a large way – £10 billion’s small by these standards. The position in gilts is of course rather larger. But no tightening of monetary policy here either.
Just To Explain The QE Point
Quantitative easing is making money down in the basement then using that to go buy bonds. This lowers long term rates in a manner that dealing with the Bank Rate doesn’t touch. But the influence upon rates depends upon the tenor of the bonds bought. In order to get an influence across such tenors bonds of differing maturities were bought. This means that some mature in any one month.
So, the bonds mature, the money is paid to the Bank, then what? It could feed the money back into the basement and that would be a contraction of the narrow (M0 or M1) money supply. That’s not quite what they want to do at present although that is what’ll happen at some point to a proportion of those QE bonds.
The tightening happens because government will still need to go borrow the money to pay back the BoR for those maturing bonds – issuing more gilts is monetary contraction.
So, as bonds mature they’re buying more – but only enough to cover those that have matured. Thus the decision to “maintain the stock” there.
Looks The Right Decision
As we’ve seen in recent days there’s no obvious reason to adjust monetary policy at present. Unemployment is at generational lows. We’re getting the significant wage growth that should cause. And we’ve no sign of any above target inflation. GDP growth is fine.
There’s just no reason to tinker with policy at this point.
CPI inflation fell to 1.7% in August, from 2.1% in July, and is expected to remain slightly below the 2% target in the near term. The labour market appears to remain tight, with the unemployment rate having been just under 4% since the beginning of this year. Annual pay growth has strengthened further to the highest rate in over a decade. Unit wage cost growth has also risen, to a level above that consistent with meeting the inflation target in the medium term. The labour market does not appear to be tightening further, however, with official and survey measures of employment growth softening.
As far as any economy can be we appear to be in the sweet spot.
The Future of Monetary Policy
As Moody’s Analytics says, there’s nothing really, other than Brexit, which would indicate any imminent change in matters either:
…though we caution that all of its forecasts are based on the assumption of a smooth Brexit. And while the bank downgraded its GDP forecasts for 2019 and 2020, as expected, on the back of entrenched uncertainty, it raised its outlook for 2021 and beyond. Our view remains that the BoE won’t follow the dovish footsteps of the Fed and the ECB if a no-deal Brexit is avoided; we forecast no move this year and one hike in 2020.
There is always that Brexit problem – no one knows whether it will happen and how it will if it does. Absent that problem the British economy is doing just fine. What’s wrong with rising wages, quiescent inflation and low unemployment after all?
Thus, absent that Brexit, I’d expect no change in fiscal policy any time soon.
The Investor View
Plan on interest rates and QE being held as they are at least through the end of this year. A disorderly Brexit and or a Labour win in any possible election would change this. But the economy itself, as it is now, doesn’t require any change.
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