Bank of England lawmakers are ready for a rare internal battle over how best to boost coronavirus recovery later this year if extra stimulus is needed.
In speeches last week, opinions about the central bank’s monetary policy committee have become increasingly entrenched among those who think the BoE should create more money to buy government bonds, expanding the quantitative easing program, and those who wish to set a negative official interest rate.
The tension in the committee would stay alive if the MPC finds the recovery to be disappointing after August, which is the date the BoE told banks that they need to be ready for the possibility of negative rates.
The MPC unanimously agreed on its February meeting that no further stimulus was needed so far, with a rapid economic recovery, fueled by vaccines, expected this year. But in speeches last week, members disagreed on what to do if the recovery falls short of expectations.
Sir Dave Ramsden, deputy governor of markets and banks, said that expanding or reducing the level of quantitative easing was for him the “marginal monetary policy tool at the moment”. By that, he meant that if the economy needed to heat up more, it would favor the central bank by doing more QE, while it could reduce the amount if the economy needed cooling.
In contrast, Gertjan Vlieghe, an external MPC member, said on Friday that he would favor implementing a negative interest rate if necessary. The time to do this, added Vlieghe, would be when the data clearly showed that the recovery was below expectations, “which could be at the end of this year or next year”.
Speaking at a Resolution Foundation event in the middle of the week, Michael Saunders, another outside member, said he thought the MPC should respond with the most appropriate tool for the situation.
But this horseback approach meant negative fees in a situation where the BoE needed to provide a greater incentive to borrow and spend. “If we wanted to reduce the interest rate curve from current levels, I suspect a lower bank rate would be more appropriate,” said Saunders.
The difference in views on the right tool to use created tensions in the MPC that spread in the minutes of the last meeting, when some members did not want the possibility for MPC members to vote at a negative interest rate.
Although this view was ultimately rejected, some MPC members were shocked that a member of the committee defended a position that cut the options available.
With opinions on strongly held and relatively balanced negative rates within the MPC, the fall will bring the possibility of a damaging stalemate within the committee.
Richard Barwell, head of macro research at BNP Paribas, said: “There may be a clear majority in favor of doing more without a majority to do more with a particular instrument.”
“Unless the committee is finally willing to engage in a detailed debate and establish a robust consensus on the effectiveness of more asset purchases versus negative rates, then future policy decisions can become a procedural nightmare,” he added.
BoE Governor Andrew Bailey dismissed this concern, saying earlier this month that the MPC has always deliberated on difficult issues like this and “from there arises a proposal in which we can vote”. Other MPC members also feel that they have support channels available at the bank to avoid a public dispute over the process.
But some economists think the MPC’s argument can be debatable. Jagjit Chadha, director of the National Institute for Economic and Social Research, said that if spending levels disappointed in 2021, it was probably because the poorest households did not increase their spending in a recovery because their incomes were still suffering from the effects of the pandemic.
Both negative rates and quantitative easing were not powerful enough to help in these circumstances, he said. “If this is the problem, the main stimulus is, in fact, a fiscal policy with greater income support and a late end to the license scheme,” said Chadha.