Home > Bank of England, Crazy Loons, Monetary Policy > MPC Minutes, August 2012

MPC Minutes, August 2012

A quick review of this month’s MPC minutes.  Claire Jones at FT Money Supply notes that there was no discussion of a rate cut, unlike earlier months.

There is – finally – a warning on the strengthening of Sterling:

4.  Sterling had appreciated further, particularly relative to the euro. In trade-weighted terms, sterling had risen by almost 1% since the Committee’s July meeting and was 3.5% higher than at the start of the year. Although sterling remained over 15% lower than it had been five years earlier, it was around 5% higher than its average in 2011. A continuing appreciation could have a material influence on the outlook for growth and inflation in the United Kingdom.

Overall the MPC are stuck in “wait and see” mode again.  This comment scared me:

38.  The Committee discussed whether it was appropriate to expand or continue with the programme of asset purchases it had agreed at its previous meeting. Inflation was still slightly above 2% but likely to remain close to the target in the coming months. The level of underlying activity was perhaps not as weak as the GDP data for the second quarter had suggested and, with the squeeze on real incomes beginning to ease, some recovery in spending was probable. The FLS had the potential to improve funding conditions for banks materially and to encourage lending, thus providing some support to both demand and supply. These effects might be particularly marked if the FLS allowed some households and companies to borrow who had previously been unable to obtain bank credit. Set against that, the FLS might prove less effective if uncertainty and risk aversion among households and businesses were the dominant factors holding back spending in the current environment. These same factors might also limit the effectiveness of additional asset purchases.

My emphasis on the “central bank impotence” view.  There is so much uncertainty that asset purchases might not be effective.

And this beauty from the resident hawks:

For some members the decision [on more QE] was nevertheless more finely balanced, since a good case could be made at this meeting for more asset purchases. For those members [Ben Broadbent and Spencer Dale] who had voted against the expansion of the programme at the previous meeting, there were potentially costs to reversing the previous month’s decision.

What the hell?  Doing more QE this month is “reversing” the decision to do some QE last month?  And that risks what exactly?  That the central bank looks really stupid?  Our central bankers would rather not be seen reacting to “events” and changing course, month by month?

I think somebody should remind Messrs Broadbent and Dale that their comments in the MPC meetings are a matter of public record.  And if they are worried about the central bank looking stupid, it might be better for them to shut up and, preferably, resign their positions.

  1. asdasdasd
    August 15, 2012 at 14:12

    “What the hell? Doing more QE this month is “reversing” the decision to do some QE last month? And that risks what exactly? That the central bank looks really stupid? Our central bankers would rather not be seen reacting to “events” and changing course, month by month?”

    I know, Dale and Broadbent voted for £325bn in July, but for £375bn in August. What has changed? What justification do they give for changing their opinion? There’s nothing, no logic, no data. They’re staggeringly inept.

    They must be scared of voting for any change at all. Completely inert members of the MPC are extremely damaging.

    Surely at the August meeting, a rational central banker with a duel mandate of targeting 2% CPI and subject to that, stabilizing unemployment and output target would say “look, short term inflation expectations are still below target, clearly our announcement last month was insufficient. So we shall do more QE until inflation expectations are at least consistent with our mandate.” I think this might be Posen’s position: open ended QE.

    To be fair Dale and Broadbent are considerably better than Sentance, who was still calling for rate rises in April. Sentance definitely gets the prize for holding onto his opinions in the face of overwhelming empirical evidence to the contrary. They’re also better than Besley who twice voted for rate rises in July and August 2008.

    Either way until the inflation target is changed it’s going to be very difficult to get the MPC to do their job.

    • August 15, 2012 at 17:05

      Hi asd. I think we could say Dale and Broadbent are even worse than Sentance & Besley. The 2yr CPI forecast was slightly above 2% in early 2011 and 2008. So if you pretend there is no “output gap”, at least Sentance is consistent with the model. That forecast is well below 2% now, so there is no excuse at all for not acting.

  2. Ravi
    August 15, 2012 at 19:14

    haven’t you lot been listening to the politicians? the economy may be terrible, and neither the government nor the MPC has the right idea, but by god, the spirit of the olympics will carry england through!

    • August 15, 2012 at 21:50

      Hah! The spirit of the olympics… we need a… a gold standard?

  3. asdasdasd
    August 15, 2012 at 21:19

    Maybe, but in 2008 Besley was calling for rate increases to curb increases in inflation due to rising oil prices (a AS shock). Very few macroeconomists believe monetary policy should respond to volatile prices like oil. Sentance was calling for rate increases in April 2012, during the worst period of economic growth in a century.

    Either way my central banker wooden spoon definitely goes to Sentance.

    Although take a read of this by Besley in 2010:


    If you accept that the recession and subsequent stagnation have been largely due to inappropriately tight monetary policy, it does not read well.

    It’s a bit disturbing that even a economist as talented and widely respected as Besley, can get these decisions so badly wrong. It really strengthens Sumner’s case for a NGDP target implemented through NGDP prediction markets.

    Oh and I was reading* one of the early papers on the Bank of England independence.

    “The government, after consultation with the bank, would quantify the meaning of price stability, and set that as the strategic objective for the bank for the Government’s period of office. The price index would need to properly specified, so as to avoid the distorting effects of changes in indirect taxes, mortgage interest payments, and terms of trade.”

    Given this and various other macro papers in the early 2000s, (e.g. Aoki 2001, Mankiw 2003) advocating targeting core inflation, why did they decide to target headline CPI?


    * I know, I need to get out more.

    • August 15, 2012 at 21:49

      Nice finds! And yes, they are all bad. There is little benefit to arguing about the relative degree to which we are getting screwed by various central bankers :)

      Simon Wren-Lewis has written about how economists should have more direct influence over fiscal policy directly too, since the politicians keep screwing that up. Nein, nein, nein, I say.

      “Why headline CPI”. I’d bet the answer is as simple as “Europe”. The ECB was targeting the HICP, so we should too?

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