In all likelihood, today will see the most predictable yet most ineffective policy move from the Bank of England in its 19 years of monetary policy independence. We should be concerned, especially on the second point, because at a time when the economy is slowing, the limited ability of the Bank to lend a helping hand should worry us all, borrowers and savers alike.
I say predicable because Mark Carney and the Monetary Policy Committee themselves have pretty much told us the outcome. At the end of June, Carney described a change in monetary policy over the summer as “likely being required”, while the minutes to the July MPC meeting stated that “most officials expect a loosening [of monetary policy] in August”.
Carney was one of the primary exponents of forward guidance in the early part of the global financial crisis. In other words, issuing a forecast on the likely path of interest rates, to provide assurance for the economy as a whole. His dalliances with forward guidance at the Bank have been less successful, often mis-leading markets (e.g. in mid-2014, when he talked about the market’s “underestimation” of the risks of a hike). For this reason, the Bank has little choice but to follow through on recent hints, otherwise its credibility will be severely dented.
In terms of impact, you only have to look around the world at central banks grappling to find ways to spur economies and increase bank lending, notwithstanding that it was ill-placed and priced lending that contributed to the current global financial crisis and many financial crises before that.
The Bank of Japan is essentially out of ideas and options after two decades of stagnant growth and deflation. Every change in policy this year, most notably in January with its move to negative rates, has been met with a shrug of indifference and, to cap it all, the yen rises regardless. Governor Kuroda is not having a good year; we can be sure of that.
In the Eurozone, the ECB arrived late to the quantitative easing party but is already struggling, with around one-third of Eurozone debt ineligible to be purchased by the central bank because yields are lower than its deposit rate. Instead, the ECB has had to venture ever deeper into ways of encouraging lending, effectively paying banks to lend money to businesses.
So what options does the Bank of England have? A cut in Bank Rate to 0.25 per cent, from the current 0.50 per cent, is a given. But that alone would probably disappoint. There is already talk of banks possibly charging depositors because they are having such a tough time making money.
So it seems likely that the Bank will add some additional measures, such as an expansion of the Funding for Lending scheme started in 2012, take-up of which has been flagging of late. We could also see more conditional forward guidance, pinning the rate path more tightly to underlying economic conditions.
In sum, though, once the dust settles, the impact of today’s measures could well add to the growing pile of ineffective policy action of 2016.