In many respects, the Bank of England’s Monetary Policy Committee did a similar thing on Thursday, sacrificing appropriateness today (at least from an inflation risk point of view) for the hope of a better fitting growth profile over the longer term.
The problem with such a policy is that to the outside world, it can be seen in one of two ways. Many people saw my mother as frugal, sensible, but others just saw her as a little out of touch with what her son actually looked like.
Similarly, and this is where the metaphor reaches its limit, there are equally two ways of seeing the BoE’s decision to raise rates, extend its quantative easing (QE) programme and roll out a new scheme to ensure banks actually pass through the rate cut to the broader economy.
Brexit support
The first way to look at it is the way in which Bank of England governor, Mark Carney was at pains to present it during the press conference following the announcement.
In Carney’s view, the four-pronged stimulus programme is the appropriate response to the economic conditions in which we find ourselves.
“This is the response that will make the process of negotiation and transition and ultimately Brexit more likely a success. It will support it, not just in the longer term but also the near term,” he said.
Acknowledging that there remains a great deal of uncertainty both within the UK and globally, he said, whatever the outcome of Brexit, “there is a clear case for stimulus now, in order to be there when the economy really needs it”.
Going one step further, Carney added that at a broad level there are a variety of forces that are pushing down on interest rates globally.
“As the equilibrium interest rate goes down and in many jurisdictions goes negative,” he said. “We are faced with the choice of either ignoring it and running monetary policy too tight and unnecessarily contracting the economy, of missing our mandate, or of adjusting with as smart stimulus as possible, stimulus that goes through multiple channels that doesn’t go to negative rates. That is the choice we have made today.”
And, it would seem from the myriad comments flooding my inbox, many industry experts see the decision in such a light.
