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Carney Wait Prompts BOE Inertia Danger in Slump Battle: Economy
Bank of England officials will probably discuss the threat of a triple-dip recession today and prepare to sit on their hands as a looming change of governor overshadows the remainder of Mervyn King’s term.
With five months before Mark Carney takes over, the Monetary Policy Committee is awaiting results of its credit- boosting program after halting bond purchases and signaling no further interest-rate cuts for now. That backdrop will color today’s “pre-MPC” briefings in London as policy makers discuss new forecasts before their Feb. 7 decision.
“There is that element of ‘wait-and-see’ about things, and that’s not particularly to the advantage of the economic situation,” said Neil Mackinnon, global macro strategist at VTB Capital in London and a former U.K. Treasury official. “It becomes an excuse to wait until the new governor is in place. There is always the danger of policy paralysis.”
Economists predict the MPC will leave its quantitative- easing program and benchmark rate unchanged next week. MPC members’ inertia may reflect concerns that QE has lost its impact, while officials have turned their focus to the success of the Funding for Lending Scheme. Policy makers’ remarks are also increasingly addressing the next governorship and a potential revamp of their mandate in a debate sparked by Carney, who will become the first foreigner to run the Bank of England.
“The changeover has slowed things down a little,” said Jens Larsen, chief European economist at RBC Capital Markets in London and a former Bank of England official. “Everyone is angling around for this great new idea that’s going to solve the problems, and I don’t think it’s going to happen.”
In a coincidence of timing that emphasizes the clash of old and new, the Bank of England’s meeting and decision next week will take place just as Carney makes his first public appearance in the U.K. in connection with his new role. He will testify to lawmakers who have said they will ask him whether the existing policy framework is the right one for the U.K. after barely any economic growth in the past four years.
The weakness of the economy may loom during both sessions after data last week showed gross domestic product fell 0.3 percent in the fourth quarter, more than economists had forecast. While the U.S., German and Canadian economies are back above their pre-recession levels, Britain has recovered only half of the output lost during the 2008-2009 recession.
Still, a report today showed U.K. manufacturing expanded for a second month in January and output surged the most since September 2011. James Knightley, an economist at ING Bank NV in London, said this “offers hope” the economy will avoid a recession.
In response to the slump, the Bank of England cut its key rate to a record low in March 2009 and started buying government bonds, accumulating 375 billion pounds ($594 billion).
The BOE’s latest measure is the FLS, which aims to boost credit. A central bank survey this month indicated mixed results. While mortgage availability rose “significantly” in the fourth quarter, an improvement in corporate lending conditions was more pronounced for large firms than small ones.
King has signaled the BOE is still awaiting the full impact, saying on Jan. 22 that lending conditions should improve further as it “kicks in.” All 43 economists in a Bloomberg News survey forecast that QE will be maintained on Feb. 7. The MPC will also keep the key rate at 0.5 percent, according to a separate poll.
“The central bank may have exhausted its current QE program, and they’ve moved on to the FLS as a way to break the liquidity trap,” Mackinnon said. “But they’re up against it. The wait for the transition in monetary policy could create unnecessary uncertainty.”
Andrew Tyrie, who chairs the Treasury Committee, said on Tuesday he will question Carney on whether there may be a “better monetary policy for the U.K. than the current one,” under which the BOE aims to keep inflation at 2 percent. That line was prompted by Carney’s comment that nominal gross domestic product targeting could be an even “more powerful tool” to stimulate economies.
King and BOE policy makers including Ian McCafferty and Spencer Dale have also responded. The governor welcomed the debate, saying it’s “sensible” to review monetary-policy arrangements. Still, he said his view remains that a long-run 2 percent inflation target “should be an essential part of our macroeconomic framework.”
As discussions on central bank tools continue, the economy is struggling to build momentum. The government’s austerity program, inflation that’s outpacing wage growth and a recession in the euro area have undermined Britain’s recovery. The MPC will have new forecasts to guide its decision next week that King will publish at a press conference on Feb. 13.
“Looking from where we are at, it seems the MPC are not doing a lot while the economy is flat lining,” said Rob Wood, an economist at Berenberg Bank in London and a former Bank of England official. “Mark Carney is talking about quite radical monetary policies -- it does seem to be overshadowing things.”
The global backdrop may be starting to improve. In the euro region, a factory gauge rose to 47.9 in January from 46.1 in December. That compares with an initial estimate of 47.5. The index for Germany, the region’s largest economy, jumped to 49.8 from 46. Italy’s measure also rose, while France’s declined.
Also in the euro area, inflation slowed to 2 percent in January from 2.2 percent a month earlier, the European Union’s statistics office said. The jobless rate in the currency bloc was 11.7 percent in December, matching a revised November level.
A manufacturing index for China was 50.4 in January compared with 50.6 in December, the National Bureau of Statistics said. A separate gauge from HSBC Holdings Plc and Markit covering fewer businesses rose to a two-year high of 52.3 from 51.5.
Manufacturing in the U.S. expanded more than forecast in January, with the Institute for Supply Management’s factory index climbing to 53.1 from December’s 50.2.
Another report showed hiring increased in January after accelerating more than previously estimated at the end of 2012. Payrolls rose 157,000 following a revised 196,000 advance in the prior month and a 247,000 surge in November. The jobless rate increased to 7.9 percent from 7.8 percent.
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