New governor has immediate impact on BoE

Mark Carney’s arrival as the governor of the Bank of England appears to have had an immediate impact on the bank’s monetary policy committee.

This was clearly evident in his very first monetary policy committee meeting, where the unusual step was taken to issue a statement, even though there had been no change to monetary policy.

The statement was issued against a backdrop of recent rises in UK market rates. This reflected a general move higher in international rates, on the back of comments from the US Federal Reserve in June that it was considering tapering the rate of purchases of its bond-buying programme before the end of 2013.

Therefore, from a UK perspective, the move higher in market rates had little to do with the underlying performance of the UK economy.

In the words of the committee, the increase in “interest rates represented an unwelcome tightening” and if the situation was to persist, it risked “hampering the emerging recovery”.

As a result, the committee issued a statement to communicate these views to the market, with the aim of trying to bring market rates more in line with underlying economic and official monetary policy conditions.

The impact of the governor appears to have been more extensive than the decision to issue a statement.

The minutes from his first meeting, which were released last week, show unanimity on the part of the committee in their decision to not increase their asset purchase programme (that is, quantitative easing).

This is significant, as it represents the first committee meeting of 2013 where there was no split within the committee on the quantitative easing vote. The five previous meetings had seen the vote split 6:3.

While it did not come as a huge surprise to the market that the new governor voted for the status quo, the fact that two of the previous three dovish voters, David Miles and Paul Fisher (the third had been outgoing governor Mervyn King) changed their vote, did provide a surprise to market expectations.

The result of this vote would suggest that the prospect of more quantitative easing in the UK is now greatly reduced, in the near term at least. The main concerns for the majority of committee members over the last few months has been around the uncertain impact further quantitative easing would have on the economy, as well as the potential costs associated with it.

However, this is not to say that more quantitative easing cannot be completely ruled out, as the minutes refer to the view among some members that ‘asset purchases remained an effective tool’ in providing more monetary stimulus.

Instead, the next policy initiative from the committee is likely to be in the form of forward guidance on interest rate policy. Indeed, the committee has a requirement in its new remit from the chancellor of the exchequer to provide an analysis of the merits of forward guidance. This will be released at the same time as the bank’s August quarterly inflation report.

Essentially forward guidance is a policy option used by central banks to communicate to the economy (households, businesses and investors) that the stance of monetary policy is expected to remain in existence over the medium term.

The aim is to put downward pressure on interest rates, which in turn should help the economic recovery process, through lower costs of borrowing for households and businesses.

The US Federal Reserve has been providing such forward guidance on interest policy since late last year, while the ECB just this month moved away from its mantra of never pre-committing, by stating that it expects interest rates to “remain at present or lower levels for an extended period of time”.

Mr Carney already has experience in relation to forward guidance. In his previous role as governor of the Bank of Canada, he introduced a form of forward guidance back in 2009.

So it looks likely that his impact on the committee will continue to increase next month as the Bank of England moves into the realm of forward guidance.


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