Monetary Policy Committee meeting, Bank of England. 5th November 2020

Bank of England increases asset purchases by £150b.    

The Bank of England’s Monetary Policy Committee voted unanimously at its meeting on 5^th December to increase its asset purchase programme by £150b. – in other words, from £725b. to £875b. This was a response to the inevitable deterioration of the UK economy in the final months of 2020 due to the imposition of a four-week national lockdown the same day. Interest rates remain at 0.1% and the MPC stated that “If the outlook for inflation weakens, the Committee stands ready to take whatever additional action is necessary to achieve its remit.”

Unlike its counterparts at the US Fed or the ECB, the Bank of England’s MPC has not issued any forward guidance regarding the earliest dates at which interest rates may have to be raised or assets run off.  Indeed, the minutes of last week’s meeting stated that “CPI inflation is expected to remain at, or just above, ½% during most of the winter, before rising quite sharply towards the target as the effects of lower energy prices and VAT dissipate”. (Italics added for emphasis)

The MPC made no mention of the quantity of money, which continues to grow strongly. In the three months to September, UK M4X grew by 6.1%, much lower than the figures of 20-30% or more seen in April and May but still strong by recent standards. This poses the question as to whether the MPC really understands the function of money in a modern economy. Under normal circumstances, money growth, even at September’s level, would not be accompanied by yet more monetary loosening. The purchase of assets (or “Quantitative Easing”) is a tool which should be used only to boost money growth. There is in fact very little which monetary policy can do in the short term when consumers are facing uncertainly, including potential unemployment, and are thus keen to reduce their debts and increase their money holdings. With demand weak, many companies likewise could well be hesitant to invest until the worst of the coronavirus is over.

The strong money growth which has come about through previous fiscal and monetary loosening is likely to be inflationary when the economy recovers. It could therefore be argued that yesterday’s move will do little in the short term and only stoke the fire further in the long term. It can but be hoped that when inflation does start to rise, the MPC will be as quick to unwind QE (and thus dampen money growth) as it has been to boost it.

You can access further details on the latest monetary developments in the UK in our monthly reports and videos at https://mv-pt.org/monthly-monetary-update/ .

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