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| What are the Bank of England's options for Super Thursday? | What are the Bank of England's options for Super Thursday? |
| (21 days later) | |
| The moment has arrived when the Bank of England has to decide how to respond to Britain’s decision in June to leave the EU. On what has been dubbed Super Thursday, Threadneedle Street will make up its mind what to do after assessing the prospects for growth and inflation in the months and years to come. Rarely has a meeting of the nine-strong monetary policy committee been so eagerly awaited. So what are the Bank’s options? | The moment has arrived when the Bank of England has to decide how to respond to Britain’s decision in June to leave the EU. On what has been dubbed Super Thursday, Threadneedle Street will make up its mind what to do after assessing the prospects for growth and inflation in the months and years to come. Rarely has a meeting of the nine-strong monetary policy committee been so eagerly awaited. So what are the Bank’s options? |
| Option 1: do nothing | Option 1: do nothing |
| Some economists think the MPC should sit on its hands. Some argue it is too early to say what the impact of Brexit will be. Others say that none of the measures that are likely to be made by the Bank will make any positive difference and might do some harm. The former MPC member Kate Barker, for example, said stimulus could drive down the level of the pound, raising the price of imports and cutting living standards. But expectations of action from the Bank are so high it seems improbable that the MPC will stonewall. | Some economists think the MPC should sit on its hands. Some argue it is too early to say what the impact of Brexit will be. Others say that none of the measures that are likely to be made by the Bank will make any positive difference and might do some harm. The former MPC member Kate Barker, for example, said stimulus could drive down the level of the pound, raising the price of imports and cutting living standards. But expectations of action from the Bank are so high it seems improbable that the MPC will stonewall. |
| Likelihood: 1/10 | Likelihood: 1/10 |
| Option 2: cut interest rates from 0.5% to 0.25% | Option 2: cut interest rates from 0.5% to 0.25% |
| A cut in interest rates is regarded by the City as a nailed-on certainty. As far as the markets are concerned the only question is whether the Bank will cut official borrowing costs to 0.25% or go even further and cut them to 0.1%. The arguments for a smaller cut are that it leaves something in the tank, should conditions continue to deteriorate over the autumn. It would also cause fewer problems for the high street banks, which have been warning Mark Carney that ultra-low or even negative interest rates would hit their balance sheets. The argument for going the whole hog is that a bigger cut would have more impact, not so much on the economy but as a confidence-building measure. | A cut in interest rates is regarded by the City as a nailed-on certainty. As far as the markets are concerned the only question is whether the Bank will cut official borrowing costs to 0.25% or go even further and cut them to 0.1%. The arguments for a smaller cut are that it leaves something in the tank, should conditions continue to deteriorate over the autumn. It would also cause fewer problems for the high street banks, which have been warning Mark Carney that ultra-low or even negative interest rates would hit their balance sheets. The argument for going the whole hog is that a bigger cut would have more impact, not so much on the economy but as a confidence-building measure. |
| Likelihood of cut to 0.25%: 9/10. Cut to 0.1%: 1/10. Cut to below zero: 0/10 | Likelihood of cut to 0.25%: 9/10. Cut to 0.1%: 1/10. Cut to below zero: 0/10 |
| Option 3: expansion of the funding for lending scheme | Option 3: expansion of the funding for lending scheme |
| The Bank and the Treasury regard funding for lending as one of their more successful initiatives in response to the last crisis. When the economy was struggling in 2012, Threadneedle Street offered high street banks the opportunity to access funds at low interest rates, provided they lent it on to households and businesses. Banks and building societies wanting to access the FLS have to pay a fee of 0.25% of the money borrowed. One option for the Bank would be to cut this, and perhaps even abolish the fee altogether. | The Bank and the Treasury regard funding for lending as one of their more successful initiatives in response to the last crisis. When the economy was struggling in 2012, Threadneedle Street offered high street banks the opportunity to access funds at low interest rates, provided they lent it on to households and businesses. Banks and building societies wanting to access the FLS have to pay a fee of 0.25% of the money borrowed. One option for the Bank would be to cut this, and perhaps even abolish the fee altogether. |
| Likelihood of more generous funding for lending scheme: 9/10 | Likelihood of more generous funding for lending scheme: 9/10 |
| Option 4: expansion of quantitative easing | Option 4: expansion of quantitative easing |
| Quantitative easing involves the Bank going into the financial markets and buying bonds. The bonds are exchanged for cash and, if things go as planned, this has two beneficial effects. Firstly, the extra cash finds its way into the economy, boosting spending. Secondly, QE drives down the interest rate (or yield) on government bonds and this feeds through into cheaper borrowing for those taking out bank loans and overdrafts. Over the years, the Bank has bought £375bn of bonds, but there are drawbacks. The extra cash from QE appears to have done more to boost house and share prices than the “real” economy. What’s more, long-term interest rates are already extremely low. There has been speculation that the Bank will announce purchases of corporate bonds in addition to government bonds, but again this may be kept in reserve. | Quantitative easing involves the Bank going into the financial markets and buying bonds. The bonds are exchanged for cash and, if things go as planned, this has two beneficial effects. Firstly, the extra cash finds its way into the economy, boosting spending. Secondly, QE drives down the interest rate (or yield) on government bonds and this feeds through into cheaper borrowing for those taking out bank loans and overdrafts. Over the years, the Bank has bought £375bn of bonds, but there are drawbacks. The extra cash from QE appears to have done more to boost house and share prices than the “real” economy. What’s more, long-term interest rates are already extremely low. There has been speculation that the Bank will announce purchases of corporate bonds in addition to government bonds, but again this may be kept in reserve. |
| Likelihood of Bank expanding QE by £50-75bn: 6/10. Likelihood of buying corporate bonds: 2/10 | Likelihood of Bank expanding QE by £50-75bn: 6/10. Likelihood of buying corporate bonds: 2/10 |
| Option 5: forward guidance | Option 5: forward guidance |
| Mark Carney is a big fan of forward guidance, which is where the Bank seeks to reassure the private sector about its intentions over the period ahead. It looks odds-on that the MPC will commit itself for providing as much stimulus as it takes for as long it takes to ensure that the economy is well clear of recession. Markets are looking out for signals that interest rates will remain at rock-bottom levels for the next two years. | Mark Carney is a big fan of forward guidance, which is where the Bank seeks to reassure the private sector about its intentions over the period ahead. It looks odds-on that the MPC will commit itself for providing as much stimulus as it takes for as long it takes to ensure that the economy is well clear of recession. Markets are looking out for signals that interest rates will remain at rock-bottom levels for the next two years. |
| Likelihood: 10/10 | Likelihood: 10/10 |
| Option 6: people’s QE/helicopter money | Option 6: people’s QE/helicopter money |
| Doubts about the effectiveness of interest rate cuts and traditional QE have led some economists to press for more radical options. These include a scheme whereby the Treasury would issue new infrastructure bonds for public investment projects and the Bank would buy them using newly created money. There have been hints from Theresa May’s government that it is considering this option, although it would probably only happen at the time of the autumn statement later in the year. Other forms of helicopter money include tax cuts financed by QE or spending vouchers for the public financed in the same way. With Britain already running a record balance of payments deficit the government will probably be wary of adding to the imbalances in the economy by overstimulating consumer spending. | Doubts about the effectiveness of interest rate cuts and traditional QE have led some economists to press for more radical options. These include a scheme whereby the Treasury would issue new infrastructure bonds for public investment projects and the Bank would buy them using newly created money. There have been hints from Theresa May’s government that it is considering this option, although it would probably only happen at the time of the autumn statement later in the year. Other forms of helicopter money include tax cuts financed by QE or spending vouchers for the public financed in the same way. With Britain already running a record balance of payments deficit the government will probably be wary of adding to the imbalances in the economy by overstimulating consumer spending. |
| Likelihood: Currently 0/10. At a later stage 3/10 | Likelihood: Currently 0/10. At a later stage 3/10 |
| In reality: a combination | In reality: a combination |
| The Bank has discussed a package of measures that would include a combination of some of the ideas mentioned above. The likeliest mix is 0.25 point interest cut and a beefed-up FLS, perhaps buttressed by a resumption of QE. | The Bank has discussed a package of measures that would include a combination of some of the ideas mentioned above. The likeliest mix is 0.25 point interest cut and a beefed-up FLS, perhaps buttressed by a resumption of QE. |