Just Another Day When the Bank of England “Does Nothing”
As normal, I felt like ranting and raving after watching Mervyn King speak at the Inflation Report press conference yesterday. But I’ll skip all that, it’s all been said. Yesterday the Bank (reluctantly) eased UK monetary policy, and that should be celebrated. The combined effect of Messrs Draghi, Bernanke, Abe and Carney has probably been more significant for the UK economy, but the Bank put the cherry on top.
All that “happened” yesterday was that the Bank of England held a press conference and published some documents. That’s all they “did”. They didn’t print any money. They didn’t fiddle about with interest rates; no “levers” were pulled. They just communicated. Here’s the WSJ:
Sterling dropped to a six-month low against the dollar Wednesday after Bank of England Governor Mervyn King said the Monetary Policy Committee is prepared to undertake more measures to stimulate the economy at a press conference following the release of the quarterly Inflation Report.
The pound weakened almost 1% against the dollar and traded as low as $1.5535, while it dropped 1.3% against the euro, which jumped to GBP0.8684. The selloff in sterling came after Mr. King said more needs to be done to stimulate external demand in the U.K. economy, hinting that more currency weakness would be helpful.
In the grand scheme of things, the change to the UK monetary policy was tiny – the Bank moved its forecasts of inflation up a few tens of basis points, and the Governor said he wouldn’t tighten policy in response. This tiny change was significant enough to knock 1% off Sterling. Imagine what “regime change” could do!
A monetary policy is not just the central bank doing something right now. A monetary policy is some sort of rule that tells the central bank the different things it should be doing under all sorts of different circumstances in the past, present, and future.
We have to think of monetary policy that way. First, because the effects of the central bank doing something right now, and whether those effects are good or bad, will depend on the circumstances. Second, and more importantly, what the central bank does right now isn’t the only thing that matters. What it did in the past matters too. And what it is expected to do in the future matters even more.