Tonight:
4°c
The monthly meeting of the Bank of England's Monetary Policy Committee (MPC) starts today and while these things are rarely dull — not these days anyway — this promises to be even more meaningful than most. As one of its former members, the economist Charles Goodhart, pointed out this week, policy set at this meeting is likely to take us through to the election.
He was not claiming to have any insight into the working of the Prime Minister's mind, still less that he was planning an early trip to the polls. Rather, he pointed out that any debate about the effectiveness of quantitative easing (QE) or a proposal to adjust interest rates will become much harder after this meeting for two reasons. Firstly, the imminent reversal of the 12-month cut in VAT, assuming the Government sticks to its timetable to restore it to its old level around the anniversary of the cut, will disrupt spending patterns economic data and of course the price level. That will make it even harder than usual to see what is happening underneath in the real economy, particularly when it comes to gauging the amount of inflation in the system. Add in the general upheaval caused by Christmas, and the price cuts of the New Year sales, and the chances are the “noise” in the economic data will get in the way of any serious policy initiatives until February.
But once we are that far into the new year then we really will be getting to a point where election fever becomes rampant. While as Goodhart says this does not prohibit central bankers from juggling with interest rates, for obvious reasons it is something they prefer not to do. Politicians are sensitive enough at the best of times to what they see as interference — witness the ridiculous sacking of the drugs policy adviser last week. They become even more paranoid at election times. It's not a good time for policy initiatives.
This timetable gave added point to Goodhart's comments and those of his fellow panellists and ex-MPC members DeAnne Julius and Willem Buiter who were giving their views on whether QE was working and when would be the right time to reverse it. Their conclusion was that they thought it must be working if only because it would be hard to conceive of such a huge stimulus having no effect. But how much was impossible to quantify — as was working out where we would have been if it hadn't taken place. Buiter did make the point strongly that it would have been a lot more effective if the Bank had bought corporate bonds rather than gilts, thereby injecting money directly into the system rather than seeing it getting stuck in the banks.
The Bank in many ways is as confused as everyone else as to how success might be judged. Deputy Governor Charles Bean said back in July that a revival of bank lending would be a suitable measure of its success, but in October he reversed himself and seemed to say bank lending was no longer the key test.
Then, to add further to the confusion, one of his colleagues suggested QE might easily lead to a short-term drop in lending, but still be thought of as a success.
But this brings us back to this week's meeting and the fact that it is important because it really is make your mind up time for the committee on whether it is working and by extension on whether to contract, to maintain or to expand the QE programme.
Goodhart said that were he in charge he would ask for permission for a further £25 billion of QE, but with the intention that this would not be used unless things took a significant turn for the worse. And he summed up what will probably be the view of many if not the committee when he said QE has been necessary and it was fair to assume it had been beneficial and largely responsible for the astonishing rally in the stock and bond markets.
But you can have too much of a good thing and perhaps we are approaching that point.
We will soon know if he is right or at least whether the MPC agrees.
EU finally finds its way to get at the hedges
Hedge funds and private equity have made a lot of noise about proposals from the European Union to regulate them more closely although they have scant success in reversing the tide — much to the bemusement of many of the European politicians who pushed for the legislation in the first place.
Whether it is the truth or simply mischief-making, rumour has it that EU drafters made the proposals deliberately harsh, so that they could then make some concessions when the UK Treasury protested, but still retain the bulk of what they wanted in the legislation.
They were baffled therefore when the UK Government kept its counsel, and indeed was reportedly saying to the UK financial services industry that the hedge funds would simply have to put up with it.
The Treasury was too busy helping the Prime Minister save the world to get engaged with this side show. Policy since then has changed, and the Treasury is now fully engaged though still without any serious sign of success.
But, I asked my French mole, why pick on the hedge funds in the first place when they were not responsible for the crisis? “It is like when there is someone in a pub that you have never liked,” he replied.
“When a fight breaks out, you hit him anyway, not because he caused the fight but because you have always wanted to.”
