THE latest inflation report from the Bank of England (BoE) makes it clear that the credibility of the Monetary Policy Committee (MPC) has been undermined further. The relatively sharp upward revision to CPI inflation forecasts out to the third quarter of 2013 is now rather more realistic, but that realism is tainted by the scepticism relating to previous forecasts which have proven to be woefully poor.
Meanwhile, not everyone is reading between the lines carefully enough. The gilt market was heartened by the downward revisions to near-term GDP forecasts, most likely because it would appear to keep the “more quantitative easing (QE) at a later date” option open. However, the latter is a nonsensical deduction. There is a very distinct chance of more QE at a later date, but for a completely different reason or, rather, exactly the same reason as in the fourth quarter of 2011. Mervyn King noted of the balance of opinions on the MPC: “You can make an argument for doing more asset purchases or indeed an argument for making fewer asset purchases” – which is to say that opinions remain very polarised over QE. However, as King later noted, the Bank of England (BoE) would act if the Eurozone crisis escalates and again (that is, as in the second half of 2011) threatens banks’ funding – so this is the one thing the MPC agrees on as a reason for more QE.
One has to laugh at the assertion by King’s deputy, Charles Bean, that the MPC was overly swayed by the experience of the early 1990s in terms of the impact (or lack thereof at the time) of a sharp depreciation in sterling on inflation. How could the MPC collectively assume a comparison between the early 1990s and the post-2007 was valid? After all, the western financial system was not in total disarray then, even if the Scandinavian system collapsed at the time – in fact, the western financial system was in good health. Western world demand was still the key element in determining the prices of raw materials, food and energy prices at the time, with emerging market and Bric demand merely an addendum, and the impact of technological developments and the globalisation of production was only just starting. Global foreign reserves, the elephant in the room of current capital flows, stood at $1 trillion, were only $2 trillion even in 2000 but now stand around $9.5 trillion. The appalling dearth of lateral thinking on the MPC that Bean’s comments evidence, should in fact raise sizeable doubts about its competence, and by extension beg the question: sterling/gilts = safe haven. Are you sure?
But prize for King’s least insightful comment (and I could use other, less complimentary terms) is this drivel: “There is no obvious reason to believe that we can’t get back to the level of output that we were on the pre-crisis trend path, but it may take 10, 15 or maybe even 20 years to get there.”
Marc Ostwald is a strategist at Monument Securities.