UK MPC preview: market measures more important than rate decision
Simon Ward
2 Comments
Three-month sterling LIBOR eased to 5.95% at its fixing yesterday but remains detached from Bank rate at 5.25%. As well as the appropriate level of official rates, the MPC ought to discuss ways of closing this gap at its meeting this week.
The Bank of England’s money market operations are no longer a technical adjunct of the policy process but have become central to achieving the MPC’s aims. Mervyn King has promised new facilities to ease banks' longer-term funding difficulties. The form and scope of such measures should be discussed and decided upon by the full MPC, not a select group of Bank officials. To emphasise its increased focus on market rates, the MPC could communicate its plans for narrowing LIBOR / Bank rate spreads along with its rate decision at midday on Thursday.
My MPC-ometer suggested financial market pressures warranted a cut in Bank rate last month. It has stuck to its guns this month, forecasting a 6-3 vote for a quarter-point ease. Interestingly, the Sunday Times Shadow MPC also voted 6-3 for a reduction, with one member seeking a half-point move.
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Reader Comments (2)
Simon,
From my limited access to information it appears that central banks will "bail out" problem banks by disentanglement of good and bad assets.
Have you any feeling on the amount of money this will take as a percentage of what the central banks holding as reserves. I think this is important because if the central banks are going to have to effectively print money,even if the instuments they buy are not worth very much they are still worth something so perhaps this would reinforce the price trend appearing in food and I can then steer my clients towards a higher inflation environment.You may have allready dealt with this in previous work in which case please refer me but in any event your thougths would be appreciated
Thank you
David Jebb (Chartered Financial Planner)
You are right that the authorities are encouraging banks to separate good and bad assets and there is likely to be some element of public subsidy for the latter. For example, the US Congress is discussing a scheme whereby banks write down mortgage loans to eliminate negative equity in return for a government guarantee on the lower principal.
More radical initiatives are possible. After the late 1980s savings and loan crisis, the US government set up the Resolution Trust Corporation to acquire and sell at a discount assets of failed S&L institutions.
However, such solutions are unlikely to involve bad assets coming on to central banks’ balance sheets, to be financed by printing money. The Fed did not acquire assets of failed S&Ls in the early 1990s. Mervyn King has made it clear that, while the Bank of England is prepared to increase its lending to banks against less liquid collateral, the credit risk of the underlying assets will remain with the banks themselves. The Bank has also been “sterilising” the impact of such lending.
Global money growth is currently very strong and is lending support to commodity prices but I doubt there will be a further boost from the mechanism you suggest.