No win for the MPC

 Minutes of the July Monetary Policy Committee meeting were released this morning and make (moderately) intriguing reading. 

The headline is that for the first time in ages the Committee was unanimous in voting not to increase the Asset Purchase Programme (aka QE, aka printing money), after 5 months on the bounce of seeing three of the nine members voting for more QE. To be fair one of those three was former Governor King who’s no longer there, but nonetheless this still came as a bit of a surprise. 

The text of the minutes holds a couple of juicy nuggets for the nerds amongst us. First it’s very clear that there was a bit of running scared after the recent increases in market rates. You’ll remember that hints from the US Fed that they might reduce the cheap money supply triggered a jump in swap rates, which in turn forced some lenders to increase their interest rates – notably for us, mortgage fixed rates. 

Following that, the MPC announcement on July 4th came with an unusually long statement clearly saying this rise in rates was not warranted. Now we have the process behind that statement:

“ . . . this increase in interest rates represented an unwelcome tightening . . . that were it to persist, would risk hampering the emerging recovery. 

. . .  the onus on policy at this juncture was to reinforce the recovery by ensuring that stimulus was not withdrawn prematurely . . . The recent rise in market interest rates, were it to be maintained, would represent such a premature withdrawal” 

So even doing nothing wouldn’t be good enough – the committee felt it had to do nothing very vigorously indeed lest the red-braces brigade assume no news was (for them) bad news.

On the face of it, that would argue for doing more QE, but the debate about the effectiveness of that and the recent improved data is still enough to keep the sceptics holding off. So what swung Paul Fisher and David Miles – those recently in favour of more stimulus – towards the majority this time? I would guess it’s this:

“An expansion of the asset purchase programme remained one means of injecting stimulus, but the Committee would be investigating other options during the month, and it was therefore sensible not to initiate an expansion at this meeting.”

What those other options are remains tantalisingly unstated. Cutting base rate further? Something even newer and more innovative than Quantitative Easing or Funding for Lending? Both seem unlikely but can’t be ruled out. Or perhaps it’s a reference to the review – due next month – into whether the Committee should give more so-called forward guidance, and/or target interim measures such as growth or unemployment rather than the pure (and increasingly theoretical) inflation target.

For those still keen on more activity, then, the promise seemed to be not so much jam tomorrow, but very probably jam in August.

Perversely, the upshot of all this was, of course, to do nothing and it seems not quite vigorously enough. On publication of the minutes this morning, Sterling immediately jumped 0.5c against the dollar and I understand bond yields (that underpin swap rates) did something similar. The MPC will be desperately hoping this is a just a short-lived overreaction but it’s probably compounded by the fact that the Bank has revised its growth estimate for May-July up a bit (argument for less cheap monies) and some members noting that doing more QE now will make it harder to unwind in the future (so some at least are already thinking how and when to kill it off).

Incidentally, as expected swap rates have fallen back a bit in the last couple of weeks but are still well above the lows of earlier in the year. Lenders seem to have calmed down a little with some even able to improve their rates – but we’re still seeing some forced to increase further. Turbulent times, and I suspect we could have another month of rate uncertainty until the next Great New Wheeze is published.


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