There are two big questions for the Bank of England when they announce their decisions on monetary policy this lunchtime.
The first is whether they will cut interest rates, as the US Fed did yesterday, by 0.25%. The truth is, no one is expecting them to, even though, as ever, I suggest that they should.
The second is what they will do about quantitative tightening (follow the link for a full explanation of what that means). On Monday, the FT had this to say on that decision:
The Bank of England is expected to sharply slow the pace at which it is shrinking its balance sheet, with some investors calling for a “shock and awe” suspension of all active bond sales in an attempt to relieve pressure on the market for UK government debt.
The Monetary Policy Committee will announce on Thursday, alongside its latest interest rate decision, whether it is dialling back the pace at which it is cutting its gilt holdings as part of its quantitative tightening programme.
That, in my opinion, is the most important question of the day.
Quantitative tightening (QT) has been sold by the Bank of England as a way of “restoring discipline” to the public finances, as if it is finally putting right the supposed “excesses” of quantitative easing. But this is a myth. What QT has actually achieved is something quite different:
- It has pushed up long-term interest rates by forcing down the price of gilts, as UK government bonds are commonly called.
- By selling gilts back into the market at the same time as the government is issuing record new debt, QT has fuelled instability rather than calming it.
- It has created wholly unnecessary losses at the Bank of England. Bonds bought at higher prices during the crisis years are now being sold back at much lower prices. The difference is met by the Treasury, meaning the government is, in effect, directly subsidising City traders.
- It has reinforced a dangerous economic myth. By pretending that the government must go cap-in-hand to the markets to raise funds, QT sustains the false idea that austerity is unavoidable. The reality is that the government, through the Bank, creates its own money. QT hides that truth.
So the real question today is not whether the Bank slows the pace of QT, but is instead whether it is willing to admit that the whole exercise has been a damaging error.
The government's need to encourage investment at present is glaringly apparent, whether that be in public services, in the climate transition, or in rebuilding an economy hollowed out by years of neglect. QT gets in the way of all that by deliberately constraining the capacity of financial markets to play a part in this process by reducing the liquidity within them.
The best decision today would be to suspend QT altogether. That would relieve pressure on the gilt markets, reduce the cost of government funding, and stop the unnecessary transfer of billions from taxpayers to bond traders. Whether, however, the Bank of England has the courage to admit its mistake is another matter altogether.
Taking further action
If you want to write a letter to your MP on the issues raised in this blog post, there is a ChatGPT prompt to assist you in doing so, with full instructions, here.
One word of warning, though: please ensure you have the correct MP. ChatGPT can get it wrong.
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“Doubt is not a pleasant condition but certainty is absurd.” (Voltaire)
Might Q. E. be an example of the tyranny of theory detatched from reality?
“In theory, theory and practice are the same. In practice they are not.” (Yogi Berra?)
Might a fundamental functioning flaw of the B. O. E be its remarkable lack of reasonable, whole society representation on its governing body?
Much to agree with
Without going tinfoil hat, isn’t #3 the whole point? The single transferable party has, with its predecessor, allowed and encouraged via its captured economically illiterate apparachniks a full blown kleptocracy. And the icing on the cake will be the further carve out by Trump’s tech bros and their sweetheart tax deals.
They have their fingers in their ears and it doesn’t (they think) personally affect them.
Private profit, public squalor.
Incidentally, much fuss has been made about CPI inflation staying at 3.8% but if you look at the annual progression of the index, I think it has actually fallen from 3.9% to 3.7% (or 3.89% to 3.72%). Inflation remains relatively high, driven by high food inflation, but the figures above paint a different picture, not least the spuriousness of such measures (which you have alluded to before).
Thought it was interesting to see this on Sky News via Apple News.
https://apple.news/ATbOP5GFRSTmDMJBNd8IadA
It doesn’t go the whole hog and talk about how the government is just owing itself money and there’s no need to sell at all, but at least it looks to explain it simply? Can’t say I ever see anything like this anywhere else but I have given up on news programmes mostly.
Ed Conway is OK…but the BoE was far too timid today and £70bn wiukl still do massive harm.
This feels like late 2007 / early 2008 bnefore the storm broke. They were massively wrong then, too.
I really don’t understand why the BoE doesn’t just cancel the government bonds it holds. I can see that by cancelling them it ‘unbalances’ its balance sheet and I freely admit I don’t know how central banks’ accounts work, but a write down of assets is scarcely an unknown accounting phenomenon for commercial banks.
I should add this is a genuine question – is there a good reason why the BoE needs to realise the value of these securities?
a) Cancelling them is possible – they are shown as such in the Whole of Government Accounts
b) Cancelling them would supposedly represent a loss. But the Treasaury would have a credit. It could subscribe for shares in the BoE to cover the loss as a result – all of it just paper moves.
c) Only dogma drives this. There is no other reason for what is happening.
Thank you Richard. I keep forgetting the joy of double entry bookkeeping! I also forgot that in the commercial world if you have a serious asset value write down you look to your shareholders to stump up some more capital. I wish I’d come across your way of thinking years ago – it really exposes the dogma at the heart current political and economic discourse.
Thank you Richard. I keep forgetting the joy of double entry bookkeeping! I also forgot that in the commercial world if you have a serious asset value write down you look to your shareholders to stump up some more capital.
Thank you Richard. I keep forgetting the joy of double entry bookkeeping!