Bank of England’s Juggling Act Gets Ever Riskier
The length of time monetary policy is spending at emergency settings raises concern
By Richard Barley
No disappointment. Unlike other central banks, the Bank of England on Thursday overwhelmed markets by pulling every stimulus lever available to counteract the shock of Brexit—and making clear they could yet be pulled harder. This effort, while prudent for now, is further exposing the risks of aggressive monetary policy.
Gov. Mark Carney and his colleagues certainly weren’t timid. The BOE cut rates by a quarter percentage point to a record low 0.25%, with a further cut possible, although Mr. Carney made clear that negative rates weren’t on the cards. It launched a new program to provide up to £100 billion ($133.25 billion) of cheap funding to banks to support lending and reduce concerns about squeezed margins. And it announced plans to buy another £60 billion of gilts, taking its holdings to £435 billion, topped off with £10 billion of investment-grade corporate-bond purchases.
Markets had priced in easing, but not such a big-bang approach. Sterling fell more than two cents against the dollar, 10-year gilt yields hit a new record low, the FTSE 100 rose and sterling corporate bonds rallied.
There are two trade-offs the BOE is juggling here. The first is a traditional one for central banks: growth versus inflation. The answer here is easy—the BOE is right to focus on growth and overlook a possible rise in inflation. The bank lowered its forecast for growth by the largest amount ever, showing the economy crawling through the next 18 months. Despite the weakness, the bank does forecast a jump in inflation. But that is due to the steep fall in sterling, which will push up import prices.
Mr. Carney insisted that the positive effects of the stimulus outweighed the risks to financial stability, but the plan to aid banks makes it clear he’s aware of the risks.
That judgment may be right in the short term. But increasingly, it is not just that monetary policy is at emergency settings, but the length of time that it is continuing to spend there that is raising concerns.
Markets have had a sugar rush from the BOE’s policy action, but doubts about the long-term effects of policy makers’ actions just got a boost too.