Why the Bank of England probably won't change anything today

(Source: Reuters)

It's Bank of England announcement Thursday again, and many are expecting no change again. The UK's economy hasn't worsened or improved significantly, and recent meetings of the Monetary Policy Committee have seen all members against rate changes (still at 0.5 per cent) and most are against further asset purchases (commonly known as quantitative easing).

The biggest factor at play here is the replacement of current governor Sir Mervyn King by the Bank of Canada's Mark Carney. As that looms closer, the Bank is less likely to change policy.

However some argue that changes are necessary now. Jonathan Davis of Jonathan Davis Wealth Management makes the hawkish case for higher rates in today's paper:

The prudent saver would no longer be bailing out the imprudent borrower. Those with savings, who currently receive practically no interest on their capital (despite higher and higher costs of living), would spend in the economy rather than on eating and heating their homes. We would stop handing billions of pounds to banks every year. The cost of living and running businesses would plummet.

This would be a major step in bringing back real capitalism. By keeping zombie companies and households alive, we sap strength from strong businesses and families. Why should a family from Walthamstow, which earns £30,000 per annum, with three children and a mortgage, pay to keep reckless lenders in a princely lifestyle?

(Full article)

While economist Lars Christensen believes the Bank should stop targeting interest rates altogether:

There is considerable confusion about what monetary policy instrument the BoE is using. Hence, the BoE has over the past five years both changed interest rates, done quantitative easing and implement different forms of credit policies. The BoE needs to focus on one instrument and one instrument only. To be able to ease monetary policy at the Zero Lower Bound the BoE needs to stop communicating about monetary policy in terms of interest rates and instead use the money base as it’s primary monetary policy instrument. The annual targeted money base growth rate should be announced every month at the BoE Monetary Policy Committee meetings. For transparency the BoE could announce that it will be controlling the growth of the money base by it buying or selling 2-year Treasury bonds from risk and GDP weighted basket of G7 countries. The money base will hence be the operational target of the BoE, while the level of NGDP will be the ultimate target. The targeted growth rate of the money base should always be set to hit the targeted level of NGDP.

(Market Monetarist)