23rd December 2009 by Shaun Richards
This morning the Bank of England’s Monetary Policy Committee (MPC) has published the minutes from its December meeting. In itself the outcomes were low-key being an unchanged interest rate and no change in its policy to increase its Quantitative Easing programme to £200,000 million. But there are some insights in their report.
The MPC does address money supply growth and in particular focuses on the M4 measure which is a measure of broad money supply in the UK.
“M4, adjusted to exclude the money holdings of institutions that intermediate funds between banks, had declined by 5.3% on a three-month annualised basis in October, weaker than in earlier months. That fall in money balances was a source of concern.”
These are revealing words I feel. My previous articles on the subject of QE have indicated that I feel that the MPC could and should have operated it in a different manner because the methodology from the system they have applied is at best very indirect. It would appear that the MPC itself may be beginning to have doubts. There is a long paragraph describing trends around this issue that may be true but may also be categorised as waffle! However there is a sign that another area is concerning the MPC and this is bank lending to the small and medium-sized business sector.
“The performance of small and medium-sized businesses, and in particular the extent to which they may be adversely affected by constraints within the banking system, would remain a concern over the next year or so.”
The MPC also has concerns about the future of inflation. It attempts to pass over the issue of the reintroduction of the full rate of VAT (it will go back to 17.5% in January 2010 from a temporary 15% rate) and the implications of the fact that the Chancellor raised excise duties on tobacco,alcohol and fuel to compensate for the temporary reduction but will not reduce them correspondingly when VAT rises again. However they do say.
“The Committee continued to expect CPI inflation to increase further over coming months. But the degree of uncertainty over the near-term path of inflation was greater than usual. One significant uncertainty stemmed from the difficulty in predicting the size and timing of the impact of the reversal in January of the VAT rate cut. Survey data released during the month indicated that households’ medium and longer-term inflation expectations had edged up.”
I think the MPC is getting nervous about the prospects for 2010 in terms of prospective inflation and the impact of its QE programme. To be fair to the MPC there is some honesty here about these subjects. But it is continuing with a programme which even it feels has problems and one which it has shown no sign of having a plan as to how it will be reversed.
This QE programme has also had a side effect of making people who perhaps should know better very complacent about the state of the UK’s government debt market. I see many commentators implying that the market is unconcerned by our increasingly deficit bound national accounts and regarding the current level of yields as a success. Well if you buy £188,076 million of something do you think you can do so without influencing the price? Lets us not even get to the impact of one day having to reverse it.