Bank of England policymakers are set for a rare internal battle over how best to boost the recovery from coronavirus later this year if extra stimulus is needed.
In speeches last week, the views on the central bank’s monetary policy committee have become increasingly entrenched between those that think the BoE should create more money to buy government bonds, expanding the quantitative easing programme, and those that want to set a negative official interest rate.
The tension on the committee would become live if the MPC thinks the recovery is proving disappointing after August, which is the date the BoE has told banks they need to be ready for the possibility of negative rates.
The MPC unanimously agreed at its February meeting that no more stimulus was needed for the time being, with a rapid, vaccine-fuelled, economic recovery expected this year. But in speeches last week members disagreed about what to do if the upswing fell short of expectations.
Sir Dave Ramsden, deputy governor for markets and banking, said that expanding or reducing the level of quantitative easing was for him the “marginal monetary policy tool at present”. By this, he meant that if the economy needed to run hotter, he would favour the central bank doing more QE, while it could reduce the amount if the economy needed cooling.
By contrast, Gertjan Vlieghe, an external MPC member, said on Friday he would favour implementing a negative interest rate if necessary. The time to do it, Vlieghe added, would be when the data clearly showed the recovery was falling short of expectations “which might be later this year or into next year”.
Speaking at a Resolution Foundation event midweek, Michael Saunders, another external member, said he thought the MPC should respond with the tool that was most appropriate for the situation.
But this horses-for-courses approach meant negative rates in a situation where the BoE needed to provide a greater incentive to borrow and spend. “If we wanted to lower the yield curve from current levels, then I suspect a lower bank rate might be more appropriate,” Saunders said.
The difference in views of the right tool to use has created tensions in the MPC that spilled out in the minutes of the last meeting, when some members did not want the possibility to exist that MPC members could vote for a negative interest rate.
Although this view was ultimately rejected, some MPC members were shocked that any of the committee could have favoured a position that cut the options available.
With views on negative rates strongly held and relatively balanced within the MPC, the autumn will bring the possibility of a damaging stand-off within the committee.
Richard Barwell, head of macro research at BNP Paribas, said: “There may be a clear majority in favour of doing more without a majority for doing more with a particular instrument.”
“Unless the committee is finally willing to engage in a detailed debate and establish a robust consensus about the effectiveness of more asset purchases versus negative rates, then future policy decisions could become a procedural nightmare,” he added.
BoE governor Andrew Bailey has pooh-poohed this concern, saying earlier this month that the MPC always deliberated difficult questions such as this and “out of that comes a proposition on which we can vote”. Other MPC members also feel they have back channels available in the bank to avoid a public wrangle over process.
But some economists think the argument on the MPC may be moot. Jagjit Chadha, director of the National Institute of Economic and Social Research, said that if spending levels did disappoint in 2021, that would probably be because poorer households did not increase their spending in a recovery because their incomes were still suffering 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 key stimulus is, in fact, fiscal policy with greater income support and a delayed end to the furlough scheme,” Chadha said.
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