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The UK Budget should involve the Monetary Policy Committee

The UK Budget should involve the Monetary Policy Committee Mindful Money

At 12:30pm today the UK Chancellor of the Exchequer George Osborne will stand up and announce his Budget plans for the next year and beyond. We are likely to see some news although there seems to have been quite a leaking operation going on as Chancellor’s like to “pull a rabbit from the hat.”  However in the midst of all the furore and media attention it will be easy to miss the fact that he has less ability to influence the UK economy than the Monetary Policy Committee of the Bank of England. They operate much more quietly in many respects but as one of the members Spencer Dale put it only yesterday they are responsible for this.

The substantial loosening in monetary policy undertaken in recent years

As the UK has found itself increasingly constrained in its fiscal policy due to its high budget deficit levels the policy burden has fallen on monetary policy. It is this asymmetry that is behind my campaign for democratic reform at the Monetary Policy Committee as currently it has vast power but little or no democratic accountability.

What else did Spencer Dale say?


One interesting offering was a discussion of the change in the forecasting system used by the Bank of England. This may seem arcane but as regular readers will be aware it is an implicit and maybe explicit response to a shocking forecasting record. For example the Bank of England has kept forecasting inflation below target when in fact it has been above it and at times well over twice it. This is of course awkward for a man like Spencer who once told us that his priorities were “inflation, inflation, inflation,” although he has never updated us on exactly what he meant by that!

In his characteristically confused way Spencer tells us that “some recent changes” have been made to the forecasting system but later tells us that.

I should stress, however, that the introduction of the new forecasting platform does not, of itself, imply any changes to the MPC’s forecasts or to how we set policy.

If true then what was the point Spencer? Indeed the theme of this speech was that Spencer like Genesis lives in a Land of Confusion. Many will think that this verse sums up the Bank of England these days.

Oh, superman, where are you now?
When everything’s gone wrong somehow?
The men of steel, these men of power
Are losing control by the hour

Although not of course Adam Posen of the MPC who still appears to think that he is Superman in spite of all the evidence to the contrary!

Evidence of Spencers’ confusion: Rebalancing the economy


Spencer is very keen to take the credit for the depreciation of the pound in 2007 and awaits nods of approval from his audience.

The real exchange rate has fallen substantially since 2007, as result of sterling’s depreciation

But the next bit will have the thoughtful thinking how long will it take, or perhaps will it ever happen?

But while the response thus far has been welcome, it may take considerable time for this shift in the exchange rate to have its full effect.

Er, more than five years Spencer why might that be?

Companies need to form a view as to whether the lower exchange rate is likely to persist.

So according to Spencer most exchange rate moves in the pound have had no effect at all because firms take so long to adjust that the move has gone the other way before they have!? It certainly is a rewriting of UK economic history! As well as quite a variation on the economics of the J-curve and the reverse J curve.

Spencer is confused on another front too because he tells us this

The stakes are high, especially for our children and our children’s children,

And on the same day he is part of a MPC that was buying the UK’s longest dated Gilts or government bonds. So the stakes for our children and grandchildren were raised higher up to 2060 as we purchased a further £200 million plus of our 2055 and 2060 stock raising our holdings of each stock further into the billions.

Spencer is not over trying to defend the indefensible


We do get a couple of confessions in the speech, firstly.

But this loosening also served to blunt some of the incentives driving the rebalancing of our economy.

You may want to re-read all of the previous pronouncements of MPC members on re-balancing the economy at this point or you may simply look at Spencer’s words in the trade re-balancing section above. If we leave him apparently subverting his own policies in his own land of confusion I wish to move on to his confession of some kicking of that poor battered can into the future.

In this context, loose monetary policy can in part be thought of as a form of forbearance: putting off difficult changes and adjustments to a later day.

Which later day he does not tell us. However he did tell us this.

Monetary policy cannot prevent those adjustments, nor should it try to.

Which is odd because in this speech he confesses to trying as hard as he can.

it’s three years since the MPC reduced Bank Rate to 0.5% – it’s lowest ever level – and embarked on a programme of large scale asset purchases (QE).

On the day itself as I discussed above the MPC were buying another £1.5 billion of UK Gilts. And if I may consider today’s minutes from them it would appear that even these purchases which aim to buy some £325 billion are not enough for some.

Two members of the Committee (David Miles and Adam Posen) voted against, preferring to increase the size of the asset purchase programme by a further £25 billion to a total of £350 billion.

These two gentlemen must have Andrea True Connection on repeat on their MP3 players.

More, More More…Get the action going

It would seem that for them the action described in Spencer’s speech is simply not enough.

it’s three years since the MPC reduced Bank Rate to 0.5% – it’s lowest ever level – and embarked on a programme of large scale asset purchases (QE).

I also note a new entry for my financial lexicon as such a policy of 3 years with no plans for any change looking forwards (except continuation and expansion) is described as “short-term”.

More confusion or asymmetry


We find that the fall in the value of the pound is apparently a cause of this with regards to the trade figures.

it’s encouraging that the exchange rate...the response thus far has been welcome

Ok but then it undergoes a metamorphosis as later when it emerges from its chrysalis it has transformed itself into something that has nothing to do with this.

increases in commodity and other import prices

Apparently re-balancing does not include the banks


Whilst there is some talk in this speech of possible changes in the banking sector there is (as ever) nothing concrete. Although policy is massive skewed towards benefitting the banking sector I think he hopes we will not spot that. However other areas and construction is picked out will suffer from a re-balancing.

that the cost of credit enjoyed by many companies prior to the financial crisis was unsustainably low, then our industrial structure will need to adjust to a higher cost base……

Certain industries which in the past have been particularly heavy users of bank credit – such as some parts of the construction sector – may need to change the way they operate

There does not seem to be much of a mention of banks changing the way that they operate here. Indeed there is an implicit subsidy as if the Bank of England keeps the base rate at an all-time low and via QE drives longer term interest-rates lower and banks charge companies more, who profits? Oh yes the banks again! For them re-balancing only seems to mean being offered yet more money.

What about inflation?


Here Spencer’s views can be summed up by some more lyrics from Genesis.

We’re not just making promises
That we know we’ll never keep

The evidence is against you Spencer...

Today’s UK Public Finance figures


I will be providing some updates later as part of the Budget day live blog on Mindful Money but these figures were genuinely bad. There seems to have been a failure to control public spending as it is this that is the major factor behind the deficit figure being some £12.9 billion (including financial interventions) or more than double last February’s figure. Still at least we agree on one point.

Monthly data can be volatile

Also the update confirmed that the Royal Mail pension fund will be transferred to the national accounts activating the financial alchemy I discussed yesterday.

This article was written by Shaun Richards and originally published on Mindful Money under the title: The UK Budget should also involve the Monetary Policy Committee which has more power than the Chancellor

Tags: banking reform , budget 2012 , Chancellor of the Exchequer , economics , George Osborne , monetary policy , monetary policy committee , UK Budget , UK buget 2012 , UK economy , UK Inflation , UK pensions , UK Prime Minister
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