LONDON (Reuters) - Members of the Bank of England interest rate setting committee were speaking in parliament on Tuesday. They also supplied statements to the Treasury Committee. Below are some of their comments:
MARK CARNEY, GOVERNOR, ON MONETARY POLICY
“Monetary policy is stimulative at this time, it is the only macro policy that is stimulative, fiscal policy is still restrictive, and there are a variety of headwinds going against this economy.”
“Building a war chest in interest rate terms for a potential future shock isn’t staying on point in terms of the inflation target, nor is it appropriate - in my judgement - is it appropriate or necessary given that policy can move quite nimbly if required.”
CARNEY ON INFLATION
“I think it’s more likely than not that I will be writing on behalf of the MPC a letter to the chancellor. We expect that inflation will peak in and around the October figure, October-November figures, peaking potentially above the 3 percent level.
“Inflation rising potentially above the 3 percent level in coming months is something that we have anticipated. We had signalled in fact prior to the referendum that we felt that the event of the vote to leave one of the adjustment mechanisms would be through sterling ... that passes through to prices ... As a consequence we faced a trade-off, and we still face a trade off, between having inflation above target and the need to support, or the desirability of supporting jobs and activity.”
CARNEY ON WHAT NO-DEAL BREXIT SCENARIO WOULD MEAN FOR FINANCE
“In a uncooperative outcome, which everybody wants to avoid, but in an uncooperative outcome, at least initially, the UK will be long financial services, if I can put it that way. We will have more capacity, capital, individuals, collateral, in the UK, and the EU will be short financial services because not all of that capacity will be able to go across.”
CARNEY ON PREPAREDNESS FOR NO-DEAL BREXIT
“From a capital perspective, from a liquidity perspective, from a preparedness of the financial system, it does make sense on the margin to make sure that (the banks) are robustly capitalised, including for a very bad outcome in the short term.”
CARNEY ON FINANCIAL SECTOR CONTINGENCY PLANS
“I would say that the financial sector is the most advanced... maybe one clarification: the financial sector not surprisingly is the most advanced in contingency planning. For the financial sector, as others have commentated, we broadly agree... in the first quarter it starts to be quite crucial on transition but for other businesses there’s a bit of a lag.”
CARNEY ON EU BANK BRANCHES IN UK AFTER BREXIT
“I think it would be an error to presume that we would authorise all those EU branches that are currently active here, because they are active here on an auto-framework where we have close supervisory cooperation.”
CARNEY ON CLEARING
“Those costs of fragmenting clearing, particularly the clearing of interest rate swaps, would be principally borne by the European real economy.
“And they are considerable, an implementation of a so-called location policy in its purest form would in our judgement raise clearing costs in euros ... by at least a basis point and potentially up to 3 basis points.
“Doesn’t sound like much but given the underlying volumes, it’s 20 billion euros per basis point. We don’t see that as a desirable outcome.
“The impact on the UK would be quite marginal.”
CARNEY ON PREPARATIONS FOR HARD BREXIT
“We are preparing, as we should, for the possibility of a hard exit ... without any transition period. So we’re doing all those preparations for that. There has been much less of that done in the European Union including by the member firms.”
CARNEY ON HOUSEHOLD EXPECTATIONS FOR SMOOTH BREXIT
“Despite the spike in uncertainty associated with Brexit ... at present household expectations, as a general statement, would be broadly consistent with a smooth outcome.”
CARNEY ON BUSINESS EXPECTATIONS
“In terms of businesses there has been an evolution of those expectations, in that businesses have become less confident about a smooth transition and less confident about the ultimate end state, the degree of accident.
“But less confident, not lacking confidence.”
CARNEY ON THREAT TO BOE INDEPENDENCE
“The first threat is one that developed over the course of the last two decades, in particular in the run-up to the crisis, which is thinking that monetary policy can do more than it can. Monetary policy is effective for achieving its sole objective or its primary objective which is the inflation target.”
CARNEY ON PRICE STABILITY, FINANCIAL STABILITY
“It (monetary policy) is not the principal instrument for financial stability, one of the lessons in the run-up to the crisis was a healthy focus on price stability became a somewhat dangerous distraction away from issues of financial stability.”
CARNEY ON CURRENT ACCOUNT, STERLING DEPRECIATION
“We had (...) directionally expected the current account moving up to 4.5 pct, consistent with the FPC’ s previously expressed concerns about some of the risks around the current account deficit.”
“If you look at the UK’s net international position ... it is actually quite healthy.
“We do a mark to market calculation ... of that net international investment position and it is, on the revised figures, of the order of 70 pct of GDP. That is in part helped by the structure of liability. The UK owes a lot in sterling and owns a lot in foreign currency assets ... and so with the depreciation you get a positive move and that is one of the mitigates of the risks around the current account.”
CARNEY ON PRODUCTIVITY
“What’s crucial is that we focus on what the bank can and can’t do. We can contribute to price stability, contribute to financial stability ... Our actions have implications for other variables in the economy, other outcomes in the economy, but those are not the objectives of the bank. So while we can contribute to an understanding of those we are neither empowered to, nor should we, swing those policy levers around to try to achieve for example distributional outcomes. We have very little impact on productivity over the long run, sole for the contribution of, if we get it wrong, either in price or financial stability terms, we can be detrimental to productivity.”
CARNEY ON CONSUMER CONFIDENCE
“Consumer confidence has held up relatively well and despite the spike in uncertainty associated with - and you can measure that uncertainty - despite the increase in uncertainty related to Brexit. So at present household expectations as a general statement would be broadly consistent with a smooth outcome to some future state.”
SILVANA TENREYRO, EXTERNAL MEMBER OF MPC, ON RATES
“My view is that we are approaching a tipping point at which it would be necessary or justified to remove some of that stimulus.
“So my position now is that if the data out-turns are consistent with the picture I just described of an outward gap going towards zero then I’d be minded to vote for a bank rate increase in the coming months.
“However that is very contingent on the data outturns, if the data undershoots and the indicators are not in line with those expectations, then I’ll wait until I see firmer evidence of that outward gap being eroded.”
TENREYRO ON UNWINDING QE
“The MPC before I joined the Bank made a decision that it would defer the unwinding until the interest rate has reached a point at which it could be materially lowered. I think that is a sensible judgement, a sensible decision.”
TENREYRO: I DON’T SEE A SHIFT TOWARDS QE
“Interest rates is a much more flexible instrument, you can act immediately, there is no need to involve auctions, it’s a much easier tool, so I don’t see a shift towards QE unless there is a exceptional circumstances putting the rate at a very low level in which you need to got back to QE, but I dont’ see that.”
TENREYRO ON GRADUAL UNWINDING OF QE
“My inclination... would be to proceed gradually. Now, how gradually? Well I mean if you take the extreme of gradualism in which you just let the gilts expire, in seven, eight years time from now, half of the stock will be completely absorbed, and there will be another half with longer maturity but as a fraction of nominal GDP growth that will fall quite quickly, so give it another five years and we’re talking about a balance sheet of less than five, six percent. So that’s, again, an extreme of gradualism. If the economy shows much more resilience and we have a much more positive growth outlook, of course we can proceed at a faster pace but I don’t see any rush for that.”
TENREYRO ON QE AND INEQUALITY
“It’s far from evident that QE has contributed to higher inequality. Certainty not according with what we’ve seen in the UK.”
TENREYRO ON NOMINAL RATES, INFLATION TARGET
“Given that long-term equilibrium real rates are lower, then monetary policy will need to set nominal interest rates at a lower level in order to meet the inflation target.
“Nominal interest rates will also be much closer to their lower bound, so when facing large recessionary shocks, monetary policy will more often need to turn to unconventional tools.”
TENREYRO: PREMATURE RATE INCREASE CAN BE COSTLY MISTAKE
“A premature increase might be very contractionary, more so that the equivalent decrease in the rate, and so if there is a mistake there it can be costly.”
TENREYRO ON BREXIT VOLATILITY
“We cannot really affect the response of financial markets to the negotiations, this is something that we need to, in a way, take as given. We are ... again I mean we’re framed by the remit and in so far as that doesn’t affect inflation, and employment, and growth, we will have to live with that volatility.”
TENREYRO ON SLACK IN THE ECONOMY
“Wage growth has been very, very weak, suggesting that there is still some slack in the economy, and particularly in the labour market. I don’t think that slack can persist for too long.”
TENREYRO ON PRICE ADJUSTMENTS AND BREXIT TRADE DEAL
“There might be price adjustments that will impinge on inflation. The size of those adjustments will depend on the final trade deal we reach.”
TENREYRO ON INFLATION
“The depreciation of sterling has a direct impact in our inflation figures ... we’ve seen that reflected in the CPI index, so this created exceptional circumstances of facing relatively above-average inflation together with weak demand. So in terms of implication for the MPC or monetary policy, that made the trade-off difficult because we had to wait (to see) how to balance return of inflation to target and the fact that demand was weak.
“So I think the expectation is that the pressure from this sterling depreciation will start to wane in the coming months, in fact the big effect is projected for October, so that depreciation effect will disappear form the CPI index and we will be back to normal without that depreciation effect.”
TENREYRO ON DEPRECIATIONS
“People normally expect that depreciations lead to an expansion in net exports but on impact that might not happen.”
DAVID RAMSDEN, DEPUTY GOVERNOR, ON INTEREST RATES
“I voted to maintain bank rate at a quarter percent. A majority of MPC members saw a case for removing some monetary stimulus in the coming months, I wasn’t in that majority. I mention that because I think that’s relevant to my assessment.
RAMSDEN ON MPC SIGNALS
“All nine of us in September thought that the markets at that point were actually underpricing the number of rate rises over the forecast horizon, we sent that signal clearly.
“A majority of members felt that the degree of spare capacity was eroding sufficiently quickly that the trade-off between growth being below trend and high inflation, that that trade-off was diminishing, and so they included in the minutes the point about they saw the case for a removal of stimulus if these conditions continued in the coming months.”
RAMSDEN: BANK GUIDANCE AS IT STANDS MAKES SENSE
“Coming into the Bank and now being a decision maker for the last six weeks I think that (Bank) guidance as it stands makes sense.”
RAMSDEN ON BANK RATE REMAINING MARGINAL INSTRUMENT
“Bank rate remains the marginal instrument and there are good reasons for that, we understand how bank rate operates through many cycles, so that remains the marginal instrument, that was the guidance if you like that the MPC gave in September and the guidance that we gave two years ago ... that we won’t think about unwinding QE until bank rate can be materially cut from the level it’s reached and that’s a higher level from the level it’s at now.”
RAMSDEN ON GENDER IMBALANCE IN ECONOMICS
“There are definitely women capable of doing my job, of doing the governor’s job.
“There is a real issue with the gender balance in economics, it’s two thirds male, one third female. The problems go all the way back to schools, why girls don’t do A-level economics, why young women don’t go and study economics at university.”
RAMSDEN ON SLACK IN THE ECONOMY
“The MPC has made very clear in the way it’s thinking about the economy ... is looking at the effects on demand, supply and from the exchange rate. I still think there is some slack in the economy, not a lot but still some slack in the economy.”
RAMSDEN ON SUBDUED DEMAND
“Demand had been very weak in Q2, as I recall, business investment ... hadn’t risen, although subsequently it’s been revised up, consumption was weak, so the demand ... There were some signs of stronger demand in August but demand was pretty subdued.”
RAMSDEN ON INFLATION
“Measures of domestically generated inflation are consistent with there still being some slack in the economy: they generally remain a little below levels consistent with the 2 percent target.
“Despite continued robust growth in employment there is no sign of second round effects onto wages from higher recent inflation. Earnings growth has seen some pick up when comparing the latest three months on the previous 3 months, but year-on-year growth is little changed of late.
“Inflation expectations appear well anchored, despite the sharp rise in headline inflation, which is evidence of the ongoing credibility of the Bank’s inflation target and remit.”
RAMSDEN ON WAGE GROWTH, INFLATION EXPECTATIONS
“The relationship between spare capacity and wages in the labour market seemed to me to be not that strong, in the past you would have expected the small degree of spare capacity we have to have triggered stronger wage growth but actually I think basic pay in the latest data that we have is about 2.1 percent ... so it’s picking up on shorter time horizons. And inflation expectations are anchored as far as we can tell, domestically generated inflation measures are consistent with the MPC’s inflation target.”
RAMSDEN ON MARKET CONFIDENCE
“If there were a loss of confidence in the UK ... in the markets you would see yields going up very sharply, you might well see exchange rate falling, you might well see bank rate having to rise.
“Once you start to be in that kind of world, you could have very significant fiscal consequences over and above the direct economic ones, because of the way that QE has operated.
“Looking ahead, were those kind of (confidence loss) risks to crystallise, as I said you can see the position reversing, which is why policy makers and advisers have to keep stressing why the UK has strong institutions, why it has a credible approach to policy across monetary, fiscal and financial and I do see that to be part of my role at the Bank of England along with other staff, just as it was at the Treasury.”
RAMSDEN ON GILT YIELDS
“But at the moment, when you look at gilts market, 10-year yields are about 1.3 percent so there are no signs of those fears emerging.
“We do have 10-year yields at about 1.3 percent which I always thought was a reasonable summary measure of how we are seen in the market.”
RAMSDEN ON BOE BALANCE SHEET
“Compared to other central banks, the Bank of England has relatively low capital. One key reason why the balance sheet has increased so much since its pre-crisis level of 7 percent of GDP is because of monetary and financial stability interventions like QE.
“The issue medium-term will be, in terms of where the balance sheet ends up, is the extent to which commercial banks wish to hold highly liquid assets ... wish to keep reserves at the Bank of England and the form they want to keep them in.”
RAMSDEN ON LABOUR, CAPITAL INVESTMENT
“Companies are holding onto labour, it would seem, but there is not very much capital investment.”
RAMSDEN ON INVESTMENT
“I see a real risk that as a result of the process of Brexit and the evolving uncertainties around it, business investment could turn out weaker than in the central forecast. If this were to happen then business investment growth would not necessarily compensate for sluggish consumption growth over the forecast.”
RAMSDEN ON LEARNING LESSONS FROM FED
“I will watch with interest as the FOMC (Federal Open Market Committee) embarks on its programme of gradual reduction of the Federal Reserve’s balance sheet, and seek to apply any lessons learned for our own operations.”
RAMSDEN ON CONSUMER SPENDING
“Consumers surprised us with their resilience in the immediate aftermath of the referendum, and they may do the same again over the forecast horizon as the trough of the squeeze in real incomes passes.”
RAMSDEN ON ASSET VALUATIONS
“Looking across a range of UK and overseas markets, including residential and commercial property markets, and equity and corporate debt markets, we can observe valuations that seem elevated relative to historical experience.”
RAMSDEN ON BUSINESS ACTIVITY
“Over the fifteen months since the referendum it has become much more widely understood that the process of leaving the EU will be complex – with implications for the degree of uncertainty that businesses and households are going to have to cope with. There are signs that this uncertainty is now weighing on business activity.”
RAMSDEN ON BREXIT TALKS
“Were developments in negotiations to give confidence that a deal could be struck and a disorderly exit avoided, it could buttress demand in the economy by reducing the probability attached to tail risks.”
RAMSDEN ON DERIVATIVES
“With my markets and banking responsibilities, I am particularly aware of the risk of dysfunction in key parts of the financial system, including the derivatives market. For example, if UK and EU banks lose their ability to perform regulated activities in each other’s markets, they may not be able to undertake actions which are not unusual in the lifecycle of a derivative, such as the exercise of an option or trade compression.”
Reporting by Kate Holton, Elisabeth O’Leary and Emma Rumney; editing by Estelle Shirbon
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