For the next two days the main task at hand for MPC members is thrashing out the decision on whether the economy needs more support from monetary policy and if so what form should it take.
All the signs – recent Select Committee hearings and the minutes from the last meeting – suggest there won't be much thrashing needed. The Committee has become more pessimistic about UK economic prospects – weakening activity indicators, continued eurozone tensions and a moderation in growth in markets outside Europe. The Governor's comments at the Treasury Select Committee sum it up:"I am pessimistic, and I am particularly concerned because ..for two years now we have seen the situation in the euro area getting worse with the problem being pushed down the road. What has particularly concerned me in the last several months, and why I voted for more easing in policy, is the worsening I see in the position in Asia and other emerging markets. My colleagues in the United States are more concerned than they were at the beginning of the year about what is happening to the American economy, so this is not a comfortable position to be in."
And activity indicators for June will have done nothing to change this view
- UK construction falls and confidence in the service sector falls to 6-month low
- Manufacturing PMI below 50 for second month running
- German and US manufacturing PMI fall to 3 year lows
These disappointing data are likely to be the clincher for another £50 billion slug of asset purchases. There are still questions: will the Bank continue its gilts focused QE strategy and will it make a difference? The answer to the first is almost certainly yes. Calls have been growing for the committee to look at purchasing other assets such as corporate bonds or other private sector assets such as securitised SME loans. Again we got a pretty clear steer where the Bank is right now on this from the Select Committee hearing"there are (not) necessarily problems in buying private sector assets in an extreme position, but that it is the Government in the shape of the Treasury who should be making the decisions about that, not the central bank."“If we were to buy assets that, for some reason, produced big losses, I am absolutely confident that this Committee would be the first in line to say, "Under what authority did you take that decision?”
This, however, leads us on to the second question of effectiveness. The Bank is not just expanding gilt purchases, but now also looking to the other weapons in it armoury to improve the functioning of credit markets.
- Funding for lending announcement
- The Extended Collateral Term Repo facility
- The Financial Policy Committee's direction to the Financial Services Authority to re-examine banks' liquidity buffers.
As an economist from Barclay's capital neatly put it:
"policy is undergoing a shift from the one club golf of QE to a more rounded game, using the irons and wedges of financial and fiscal policies to ahck the economy out of the rough"