Andrew Bailey appeared before a committee of parliamentarians yesterday less than a fortnight after surprising financial markets by keeping interest rates at a record low of 0.1 percent.
The Governor of the Bank of England would have been prepared for tough questions from the Treasury committee given the backlash over the decision to keep rates stable despite the fact that members of the monetary policy committee had made a series of aggressive speeches prior to the vote.
Bailey defended the Bank’s decision to MPs and his message in the run-up to the decision, but also addressed a number of other questions about the state of the UK economy.
Joining Bailey were Huw Pill, the Bank’s chief economist, who succeeded Andy Haldane in September, and Michael Saunders and Catherine Mann, who are external members of the MPC. They were asked about the inflation outlook and the strength of the labor market and discussed other issues that will inform the future trajectory of monetary policy.
Bailey said the end of the leave plan did not appear to have increased unemployment levels, but said it was too early to tell, given the lack of official data for October.
“The anecdotes suggest that the transition out of the licensing scheme has not increased unemployment, but we really don’t know the full story,” he said. “OBR’s forecast has a much larger spike in unemployment as a result of the end of the leave scheme than our forecast. That shows that, somehow, there is a lot of uncertainty around him. “
Saunders, a former city economist, said he had voted for a rate hike due to a strong job market and rising wages. He dismissed the parallels with the inflationary spiral of the 1970s, driven by wage increases.
Talking about a return to the 1970s is completely out of the question. The economy has changed in many ways since then, ”Saunders said.
Pill, the bank’s chief economist, dismissed concerns that the housing market is overheating.
He said rising prices were a factor in ultra-low interest rates and the desire of many consumers to change their lifestyles and move to larger properties outside of cities. The stamp duty holiday had also helped stimulate the market.
Pill didn’t think the house price boom was overstated. The chief economist said that real prices relative to income were not as high as they were in the “mid-1970s and 1980s.”
Catherine Mann voted against an interest rate hike, but was in favor of ending quantitative easing whereby the bank creates new money to buy government bonds.
The last asset purchase program was launched a year ago “when conditions were really very different,” Mann said.
He added that inflation forecasts were much higher now than they were then, while growth forecasts had come down.
The unemployment rate was forecast to be higher than it turned out, according to the economist. “It was appropriate at the time, but the data and conditions change in light of the changed projections,” he said.
“Some indicators of the private financial market did not incorporate the trajectory of the bank rate.”
The independent member of the MPC said its main objective was “to avoid financial market turmoil,” adding: “To boost financial market behaviors, it would have been appropriate to remove some of the monetary stimulus at the end of the asset purchase program. a balance between the real economy and financial market indicators “.
Bailey said the central bank would “tilt” its own investments toward greener businesses and ventures and no longer invest in fossil fuels in its corporate bond portfolio.
“It’s an incentive policy,” Bailey said. “Future options will be incentivized towards companies that are meeting climate goals.”
The Bank is often asked why it doesn’t get rid of “bad investments,” Bailey explained. “I’m afraid that wouldn’t work because they would end up in the hands of people who just wanted to sweat the assets, so to speak.”
Bailey, 62, later added: “Much more work needs to be done on macroeconomics. [effects] climate change. “He said the environment was” entering directly on the horizon of monetary policy “and would be higher on the Bank’s agenda. Some of the recent increases in energy prices could be attributed, at least in part, to to climate change, he said.