Dale Says Carney’s GDP Mandate Suggestion Has Credibility Risks
Bank of England Chief Economist Spencer Dale said a suggestion by BOE Governor-designate Mark Carney that a central bank’s mandate may need to change to allow further stimulus poses risks to officials’ credibility.
Carney, currently Governor of the Bank of Canada, said in a speech in Toronto yesterday that interest rates close to zero mean policy makers may need to consider measures such as adopting a target of nominal gross domestic product. The BOE is charged with keeping inflation at 2 percent, and its key rate has been at 0.5 percent since March 2009.
Speaking at an event hosted by MNI-Deutsche Boerse Group in London today, Dale said the introduction of a new mandate must be considered in light of other policy options available, and in the case of the U.K., the use of quantitative easing, which he said has had a material impact on the economy.
“The punchline is, there’s no free lunch to coming out of these problems, there’s costs and risks associated with QE, and there’s costs and risks associated with things like committing to levels of GDP,” he said. “It doesn’t mean one’s right and one’s wrong but it does mean we need to see both of these in the round.”
Dale also said at GDP target is a “commitment to keep policy looser for longer than you might otherwise have done.”
“You let the economy overheat relative to what you otherwise would have done, and you do that because of a commitment you made two or three years ago,” he said. That raises two questions, first, “will people really believe that you really will let the economy overheat, and secondly, do you really want to do that.”
Carney said his comments weren’t signaling anything about Canadian or U.K. policy. He said he would save detailed comments about his Bank of England post for a parliamentary committee hearing next year.
Dale’s comments were made in response to audience questions after he delivered a speech in which he said U.K. inflation is likely to remain “sticky” and that he would have halted bond purchases even if the U.K. Treasury didn’t take income from gilts the central bank holds.
“In all likelihood I wouldn’t have voted for more QE even in the absence of the government’s decision,” Dale said. He also said while the coupon transfer doesn’t undermine the Monetary Policy Committee’s ability to set policy, there is a possible complication when those payments are reversed at some point in the future.
The Treasury said in November it will use income from the stock of bonds the BOE holds under its asset-purchase program -- about 35 billion pounds ($57 billion) -- to reduce government debt and increase the amount of money in the economy. The MPC halted its bond-buying program that same month.
Dale said that while the MPC remains “firmly in control” of monetary policy, there is a potential “sting in the tail” from the transfer as future cash flows between the central bank and the Treasury may raise “understandable concerns.”
“We should have our eyes open that large financial flows between the fiscal and monetary authorities may raise understandable concerns,” he said.
The reverse transfers are likely to take place at a time when the MPC is tightening monetary policy -- actions that will be increasing government borrowing costs rather than reducing them as now, Dale said. “This relationship might be further complicated if, at that very same time, the government has to increase its debt issuance in order to finance these reverse flows back to the bank,” he said.
Dale said that the coupon transfers didn’t warrant a vote to reverse asset purchases by an equivalent amount in November as “the impact of selling an equivalent amount of gilts is likely to have been far greater than that of the government’s actions.”
“In subsequent meetings, I’ll take the government’s actions into account, both in terms of any decision to increase further the size of the asset purchase programme and, potentially, in terms of the timing at which we begin to tighten monetary policy,” Dale said.
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