Stimulus Exit No Easy Job, Says Bank of England’s BeanScott Hamilton
Bank of England Deputy Governor Charlie Bean said policy makers face potential “potholes” when it comes to exiting the extraordinary stimulus measures they implemented during the recession, many of which put central banks into uncharted territory.
“I do not expect central banks’ collective management of the exit from the present exceptionally stimulatory monetary stance will be easy,” Bean said in a speech in London yesterday. “Market interest rates are bound to become more volatile along the exit path, however well central banks communicate their intentions.”
The challenge of how and when to remove stimulus is one that Bean won’t have to face, as he retires at the end of next month after a 14-year career at the BOE. Governor Mark Carney said last week that while the U.K. is moving closer to a point that it will need tighter policy, the inflation outlook and the need to use up more spare capacity in the economy weigh against an immediate increase in the key interest rate.
With the benchmark at a record-low 0.5 percent and the recovery strengthening, U.K. policy makers are battling rate-increase expectations. Bean echoed language the BOE used in its Inflation Report last week, saying that when it comes time to begin rate increases, the Monetary Policy Committee will move “gradually.”
Bean said the neutral level of interest rates would “gradually edge up” but would probably be “materially lower” than it was before the crisis for the next five years.
“Some of the forces that have potentially driven the equilibrium rate lower around the world are going to persist for some time,” he said. “In the crisis itself the equilibrium rate moved down very sharply. As economies are starting to recover, so it’s moving back up, but nevertheless it’s still at pretty depressed levels.”
On housing, Bean said the government’s Help to Buy plan should be viewed “in perspective” because it accounts for a relatively small number of transactions. The Financial Policy Committee won’t shy away from speaking out about the stimulus, if it thinks there is a risk and could use macroprudential tools to cool different areas of the market, he said.
“Effective application of macroprudential tools, in principle, does leave monetary policy free to be accommodative for longer to support the recovery,” Bean said.
The BOE also said last week that some reduction in the stock of assets it bought in its quantitative-easing program could be achieved without active sales, as the gilts in the portfolio mature. While Bean said this was a possibility, the fact that the weighted-average maturity of the bonds held is more than 12 years means that might take too long.
“More active sales may be called for at some stage, though the MPC would be unlikely to initiate such a program until bank rate was high enough that it could be cut to maintain demand if conditions deteriorated,” Bean said. “Such a program of sales could be expected to put upward pressure on yields, though by much less than the purchases pushed down on yields because markets would be functioning more normally.”
In his speech, Bean said his time at the BOE was marked by periods of both relative calm and unprecedented turbulence.
Since the financial crisis, the bank has been dragged into the Libor and global foreign-exchange scandals. After Carney was questioned in Parliament this year, the BOE commissioned a review of practices and procedures and is considering making permanent recordings and transcripts of MPC meetings.
Bean said he was not a “huge enthusiast” of transcripts, because they may change the nature of the debate on the panel. In addition, they might not be useful because the policy decisions are only one in a series of meetings.
“When things are transcribed, you end up coming with pre-prepared statements, you don’t really get a discussion,” he said. “Transcripts aren’t really to do with transparency, they may be something to do with accountability. I certainly do not think it would be valuable putting out real-time transcripts.”
Bean will be replaced on July 1 by Ben Broadbent, currently a part-time member of the MPC, as part of a wider management shakeup across the bank to coordinate its expanded range of powers since it was given authority over bank regulation and financial stability last year.
“As I look back, I think it is fair to say that it has been a pretty extraordinary -- indeed unique -- period to be involved in economic policy,” he said. “My first seven years were years of plenty. But the second seven years were years of famine, as the Great Moderation turned into a Great Tribulation.”