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| Bank of England keeps cool head amid rate hysteria | Bank of England keeps cool head amid rate hysteria |
| (about 1 month later) | |
| It would have been the easiest thing in the world for the Bank of England to cut interest rates at the first meeting of its monetary policy committee since the Brexit vote three weeks ago. | It would have been the easiest thing in the world for the Bank of England to cut interest rates at the first meeting of its monetary policy committee since the Brexit vote three weeks ago. |
| Surveys have shown that the shock waves from the referendum have hit consumer and business confidence hard, and had an immediate impact on both residential and commercial property. The Bank’s own assessment of the likely impact of a vote to leave has not changed since June 23: life is going to be tough, at least in the short term. | Surveys have shown that the shock waves from the referendum have hit consumer and business confidence hard, and had an immediate impact on both residential and commercial property. The Bank’s own assessment of the likely impact of a vote to leave has not changed since June 23: life is going to be tough, at least in the short term. |
| What’s more, the financial markets had been primed for a rate cut by none other than the governor of the Bank of England. In the aftermath of the Brexit vote, Mark Carney said it was his personal view that during summer the Bank would need to boost growth. As far as many in the City were concerned, that meant a July rate cut. After all, if the economy was shaky and rates were going to come down at some point, then why wait? | What’s more, the financial markets had been primed for a rate cut by none other than the governor of the Bank of England. In the aftermath of the Brexit vote, Mark Carney said it was his personal view that during summer the Bank would need to boost growth. As far as many in the City were concerned, that meant a July rate cut. After all, if the economy was shaky and rates were going to come down at some point, then why wait? |
| In the end, the Bank resisted the temptation to reduce the cost of borrowing for the first time in more than seven years. Only one of the nine members of the MPC favoured providing an instant stimulus to the economy, and it wasn’t Carney. The governor was one of eight MPC members who thought the time was not yet ripe. Cue tart comments from those analysts who called it wrong that Carney was indeed the equivalent of “an unreliable boyfriend”, forever failing to match words with action. | In the end, the Bank resisted the temptation to reduce the cost of borrowing for the first time in more than seven years. Only one of the nine members of the MPC favoured providing an instant stimulus to the economy, and it wasn’t Carney. The governor was one of eight MPC members who thought the time was not yet ripe. Cue tart comments from those analysts who called it wrong that Carney was indeed the equivalent of “an unreliable boyfriend”, forever failing to match words with action. |
| There were, though, plenty of reasons for the Bank to keep its powder dry. | There were, though, plenty of reasons for the Bank to keep its powder dry. |
| Firstly, the Bank wants to have a closer look at the state of the economy before moving. There has been very little hard data since 23 June but the picture will be clearer by the time of the next MPC meeting in early August, which coincides with the release of the Bank’s quarterly assessment of the state of the nation. | Firstly, the Bank wants to have a closer look at the state of the economy before moving. There has been very little hard data since 23 June but the picture will be clearer by the time of the next MPC meeting in early August, which coincides with the release of the Bank’s quarterly assessment of the state of the nation. |
| This will provide forecasts for growth and inflation over the coming months, and provide a justification for whatever the Bank decides to do. | This will provide forecasts for growth and inflation over the coming months, and provide a justification for whatever the Bank decides to do. |
| Secondly, the financial market reaction since the referendum has been less acute than looked likely in late June. Share prices have bounced, the pound has stabilised and even edged up a bit on the foreign exchanges, and long-term interest rates have fallen. | Secondly, the financial market reaction since the referendum has been less acute than looked likely in late June. Share prices have bounced, the pound has stabilised and even edged up a bit on the foreign exchanges, and long-term interest rates have fallen. |
| Thirdly, the economy has already received something of a stimulus from the fall in the pound – which boosts exports – and from the Bank’s decision to ease the capital requirements on commercial banks, which increases their capacity to lend. | Thirdly, the economy has already received something of a stimulus from the fall in the pound – which boosts exports – and from the Bank’s decision to ease the capital requirements on commercial banks, which increases their capacity to lend. |
| Fourthly, it is hard to see what material effect a cut in interest rates to 0.25% will have, given that they are already at record low levels. The situation is different now from the aftermath of Black Wednesday in September 1992, when borrowing costs could be cut aggressively from 10%. | Fourthly, it is hard to see what material effect a cut in interest rates to 0.25% will have, given that they are already at record low levels. The situation is different now from the aftermath of Black Wednesday in September 1992, when borrowing costs could be cut aggressively from 10%. |
| Finally, there was a risk that by acting in a kneejerk fashion, the Bank could make matters worse. If consumers and businesses get the impression that the Bank is being rushed into action, it could further dent confidence. There was also the chance that by making the announcement at the time when Theresa May was assembling her new cabinet, a rate cut would have got lost in the mix. This was a bad day to bury good news. | Finally, there was a risk that by acting in a kneejerk fashion, the Bank could make matters worse. If consumers and businesses get the impression that the Bank is being rushed into action, it could further dent confidence. There was also the chance that by making the announcement at the time when Theresa May was assembling her new cabinet, a rate cut would have got lost in the mix. This was a bad day to bury good news. |
| Threadneedle Street wants to use what limited ammunition it has at a time of its own choosing and after it becomes clear what the Treasury is going to do under its new boss. Clearly, austerity plans will be softened, but the focus on infrastructure and industrial policy has prompted talk of the Treasury issuing infrastructure bonds that would be bought by the Bank. This would be the May government’s version of something Jeremy Corbyn floated when running to be Labour leader last year: People’s QE. | Threadneedle Street wants to use what limited ammunition it has at a time of its own choosing and after it becomes clear what the Treasury is going to do under its new boss. Clearly, austerity plans will be softened, but the focus on infrastructure and industrial policy has prompted talk of the Treasury issuing infrastructure bonds that would be bought by the Bank. This would be the May government’s version of something Jeremy Corbyn floated when running to be Labour leader last year: People’s QE. |
| Nothing is really lost by holding on for three weeks and there is something to be gained. Put simply, the Bank wants to show that it is control of events rather than being forced into precipitate action. That makes sense. | Nothing is really lost by holding on for three weeks and there is something to be gained. Put simply, the Bank wants to show that it is control of events rather than being forced into precipitate action. That makes sense. |