Thursday, 4 August 2016

The Bank of England's National Brexit Policy

The news media has highlighted how the Bank of England's policy move today was the first cut in UK interest rates since 2009. But this completely misses the important points. By itself, the 25bp drop in the official Bank Rate from 0.5% to 0.25% is largely irrelevant, either as a policy move or as having any real economic impact. Instead, the significant policy decisions are elsewhere.
First, is the Bank of England's move away from its official policy target of stabilising CPI inflation at close to 2%, usually taken as meaning over the next two years. Despite the drop in sterling's exchange rate, and the expectation that this will boost UK inflation, the Bank has decided to look further ahead and cut rates today in the expectation that weaker UK economic demand, employment and output will reduce inflation again by the end of the next three years!
This is another sign of the flexibility of policy in this chronic crisis. Of course, it would have been madness to raise interest rates in the wake of the Brexit vote and the likely impact on the UK economy. However, this policy decision shows how far the rejection of previous policy norms has gone. What it really boils down to is the view that wage demands will remain limited, despite a fall in living standards, so the problematic inflation for capitalists, that of wages, will not actually be a problem. The new Bank of England policy is now closer to that of the US Federal Reserve, which has a more mixed inflation/growth/employment mandate when setting US interest rates.
Second, is the extension of Quantitative Easing (buying up financial securities from banks and other private sector holders, to put cash into the system). Until now, the Bank of England had bought £375bn of UK government bonds, but had kept that figure unchanged in recent years. In the early years  of the 2007-08 crisis aftermath, it had had only a small, temporary holding of private sector bonds. That will change with the new policy. Further government bond purchases will occur, an announced £60bn that will take the total to £435bn. All this will do is reduce government bond yields further, as happened today, and further undermine the viability of pension schemes, both public and private, increasing their funding deficits. However, the new angle is for the Bank of England to purchase up to £10bn of corporate bonds.
The latter move is extraordinary, especially in the way the Bank of England poses it as looking to "purchase a portfolio of sterling non-financial investment-grade bonds representative of issuance by firms making a material contribution to the UK economy, in order to impart broad economic stimulus". Leave aside the point that the size of the corporate bond market targeted is only around £150bn, and that they hope that BoE purchases will increase the prices and lower the rates on eligible bonds, also reducing these companies' demand for bank loans that could then be taken up by others, especially smaller companies. The key point is that the Bank of England has now entered the process of deciding to buy bonds only from firms that make a 'material contribution to the UK economy'!
I cannot emphasise enough how far this policy contradicts all the logic that we have heard for decades from policy makers, central banks and governments, of how it is necessary to compete in 'free and fair' global markets. Here we have a central bank from a country at the centre of the world financial system explaining that a part of its new policy is to discriminate in favour of companies that are nationally valuable.
If anyone doubted that the pressures of the chronic global crisis are forcing the major powers to reconsider their positions, and that they are abandoning policies of cooperation - admittedly, cooperation that has been mixed with intense rivalry - then they should consider this latest Bank of England move. The significance is not indicated by the relatively small scale size of the £10bn funds, but in the outlook it offers for future imperial policy.
Tony Norfield, 4 August 2016


Bis said...

A couple of questions:

i) Is it fair to say that the counterpart of FISCAL "austerity" in neo-liberal policymaking is the "flexibility" of monetary policy to which you draw attention in the second paragraph of your piece?

ii) will government bond yields go down further as a result of government purchases of private sector bonds because this increases the demand for government bonds driving up their prices? Why does this "undermine the viability of pension schemes"?

iii) Is the nationally preferential posture of the BoE which you highlight indicative of a new stage of inter-imperialist rivalry?

Tony Norfield said...

Reply to Bis:
i) Different policy regimes adopted by capitalist countries have a different mix of monetary and fiscal policy, with different policy targets. In the crisis, these have all been abandoned. Inflation targets were abandoned: when CPI was above target, interest rates stayed low because the economy was in a mess. Fiscal deficit targets: forget about it, and especially any significant attempt to hit 3% of GDP, etc. Monetary policy has for decades been seen as more flexible than fiscal policy, eg it is difficult to put up tax rates and cut them again within a few months. The ‘flexibility’ of monetary policy, however, has been a function of the collapse of fixed exchange rates in the early 1970s, not ‘neoliberal’ policy, whatever that means. If there ever was much sense in talking about ‘neoliberal’ policy, and I don’t think so, then there is none now.

ii) Bond yields have been driven down by the extra QE policy, involving both private and government bonds. The viability of pension schemes gets hit because pension funds cannot find high enough, steady returns from ‘safe’ financial investments that are needed to fund their liabilities paid out as pension income to their members. Many schemes had been planned and financed/paid out on a view that the average annual return of the pension fund would be around 7%.

iii) The latest BoE policy is part of a general move under way in several major powers. This has not been coordinated; it is simply a response of each of them to (a) the chronic state of the economy which is not recovering much, if at all, and (b) political fears. That is why the BoE now seems publicly to have abandoned its one target, of inflation. This national direction of policy is part of the developing mix of a new stage in rivalry between the major powers. I don’t mean war next week. It is more a case of pragmatism and bumbling to try and find some kind of solution to their problems, including new alliances and deals. But these will lead in the direction of a greater risk of conflict.