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Why isn't the UK MPC easing?

Posted on Tuesday, March 26, 2019 at 10:39AM by Registered CommenterSimon Ward | Comments2 Comments

The MPC last week left policy unchanged but the judgement here is that incoming news warrants a reversal of August’s quarter-point rate hike. Monetary trends are worryingly weak, the global economy continues to slow and business confidence has fallen to a level historically associated with policy easing.

On the latter point, the CBI yesterday released its first-quarter financial services survey, which echoed earlier industrial and business / consumer services surveys in reporting a plunge in optimism. The distributive trades survey, surprisingly, is still showing some resilience but it has often lagged the other sectors historically – see first chart.

The second chart shows a simple average of the optimism balances across the four surveys, along with Bank rate. At -28, the average is the weakest since the 2008-09 recession and similar to the level reached in 1998, during the Russian / LTCM financial crisis. The MPC has always eased policy when the average has fallen to -8 or below. (In 2011, easing took the form of additional QE rather than a Bank rate cut.)

The MPC is reluctant to admit that the August hike was a mistake and is using Brexit turmoil as an excuse to hold fire. This risks allowing a negative confidence / spending spiral to develop, requiring more substantial policy action later. The proximity of rates to the effective lower bound strengthens the case for the MPC to act pre-emptively. A rate cut could be reversed swiftly in the unlikely event of a smooth Brexit and subsequent economic bounce.

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Reader Comments (2)

Monetary easing isn't effective in any case near the ZLB.

We're just following the same path that the BOJ has trodden since 1990.

CB models are broken and have been for a long time but they won't admit it...

March 26, 2019 | Unregistered CommenterDavid Cotton

I have to disagree that the use of policy rates at these levels has any positive expansionary effect especially in the medium run.

Looking at the evidence from around the world the "expansionary lower bound" may be well above where we are now. I think easing is required and relaxing capital buffers or QE the way forward.

Also as we've seen exiting a damaging very low policy rate is difficult enough as it is without going lower.

March 26, 2019 | Unregistered CommenterTim Goldfinch

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