On Thursday the Bank of England’s Monetary Policy Committee is going to act for the first time since July 2012. Expect general excitement as one part of the British state gets round to doing something big in the wake of the Brexit vote. But this excitement should be matched by realism about what the Bank can and can’t do if we are to avoid letting other policy makers off the hook this summer.
We don’t need a mole in Threadneedle Street to know action is coming this week. Mark Carney has told us to expect a “package” – in the central banker not drug dealer sense – and he’s got the votes for that package with four of the five MPC members needed already calling for action. The Bank’s Chief Economist Andy Haldane has gone so far as to call for a monetary ‘sledgehammer’ to crack the nut of a post-referendum slowdown.
Most of the debate ahead of Thursday is focused on what that sledgehammer might be. But we would do well to spend more time discussing what exactly the nut we are trying to crack is.
In recent weeks the public has been told that the post-referendum world is looking choppy. Business surveys have signalled falls in both activity and confidence, while forecasters are lowering their growth forecasts (see below).
As a result the public, especially one told in recent years that it is the Bank’s job to support the economy not the Treasury’s, might reasonably expect this week’s package to target the nut of reversing this post-referendum slowdown.
However some commentators are arguing that the Bank should hold off trying to crack any nuts as yet. Yes there is some evidence of a slowdown. But this, they argue, simply reflects the reality that that the British economy can produce less than it would otherwise have been able to because of less trade and competition post Brexit. If the nut is a supply shock of this kind there is nothing monetary policy can sustainably do about it. Put the nutcrackers, let alone the sledgehammer, away.
Mark Carney faces the arduous task of having to explain why both the public and critics are wrong as he rejects both complacency and overclaim. The Bank’s job is not to shrug its shoulders, or to pretend it can undo the lasting damage of Britain being poorer post-Brexit.
Instead it must target the delicate nut of any demand slowdown that goes beyond the necessary adjustment to post-Brexit reality. Yes it’s rational for firms and consumers to reduce investment and spending respectively if we’re set to be poorer in the future – but if collective anxieties put us on a self-reinforcing downward spiral that goes beyond this then monetary action to boost demand is called for (especially when, for all the talk of resets, no immediate preventative fiscal response is on the cards given the lags involved).
This nuanced goal is why we will see an economic forecast from the Bank on Thursday that marks down the UK’s growth prospects significantly, despite taking into account the monetary package it is published alongside.
This is not easy to explain to the public – and requires the Bank’s rhetoric to include more humility than perhaps comes naturally. But in trying to explain the situation Mark Carney will be doing us all a favour. By spelling out what it can and cannot do the Bank will remind everyone who wants to reduce the lasting hit to the economy to focus instead on Westminster. Its trade policy, industrial strategy and public investment that really matter here, and responsibility for big choices on these issues rests in Downing Street, not Threadneedle Street.
A (tiny) interest rate cut, some Quantitative Easing and the Funding for Lending back up in lights looks the most likely package on Thursday. Radical options – from helicopter money to deeply negative interest rates – won’t get a look in as yet. We are in a bad situation but this isn’t 2008.
In some ways choosing these tools is the easy part of the Bank’s job. The hard part is going to be explaining what they intend to use them for. But doing so is important to making clear that when it comes to both the fundamental causes and consequences of Brexit the responsibility for action rests not on our central bankers, but on our elected representatives. Let’s hope the Bank is clear about that fact on Thursday.