Closing summary: Bailey says central banks have firepower left
The Bank of England governor gave little in the way of indications about short-term policy responses or any details on his view of the UK economic situation, but he did insist that cenral banks have more firepower than previously thought during times of crisis.
So should we expect future crisis interventions to be bigger? It sounds that way.
We are not out of firepower by any means, and to be honest it looks from today’s vantage point that we were too cautious about our remaining firepower pre-Covid.
But, hindsight is a wonderful thing when you have it.
If that example of central bank communication was not quite your thing on a Friday afternoon, take a minute to watch the Bank of Jamaica’s efforts. Andrew Bailey, please take note for next year’s Jackson Hole economic conference:
Here are some of the other important developments from today:
- Shinzo Abe announced he will resign as Japan’s longest-serving prime minister owing to ill health.
- The Japanese yen jumped as investors looked for a safe haven and anticipated further deflationary forces.
- Sterling rose to an eight-month high thanks in part to dollar weakness.
- UK transport secretary Grant Shapps urged people to return to offices and workplaces.
You can keep following our live coverage of the coronavirus pandemic, politics and international affairs from around the world:
In the UK, lockdown is expected to be lifted in parts of north-west England
In the US, reaction to Donald Trump’s Republican convention acceptance speech
And in our global coverage, face masks become mandatory in Paris, India records over 77,000 new cases in a day
Thank you for joining me this week for our live coverage of business, economics and markets, and please do come back next Tuesday for more from Graeme Wearden. JJ
Sterling is unmoved: it’s up 0.7% against the US dollar at $1.3291.
Some reactions from economists:
There were some signs of stress in non-bank markets. It is not a surprise that the re-regulation of the banking system would move assets away from the banking sector, he says.
That would be a happy problem to have, Bailey says.
We have observed that the savings rate has risen so there is potential pent-up spending power, he says. The most likely tool to use would be rates, however – not unwinding the balance sheet built up during QE.
The Bank is doing a “more incremental” review than the Fed, Bailey says. On communicating, Bailey says the Bank pivoted from focusing on QE to talking about forward guidance on interest rates more.
He says the Bank will need a stronger than usual body evidence of a recovery before it starts to tighten monetary policy.
He says Jerome Powell’s comments from yesterday suggest that flexibility can be useful for monetary policy.
The Fed’s policy might be slightly different to the UK’s (although similar) but it may be that the different exchange rate environment could justify different approaches.
‘Going big and fast’ could be important QE tool in times of trouble – Bailey
That adds another way for the Bank and other central banks to influence the economy: by adjusting the timing of asset purchases. He said:
Standing back from the Covid crisis, and looking at the UK case, there indeed is some evidence that the impact of QE over the past decade has been largest at times of market dysfunction and illiquidity. Of course the available event studies are very few in number. But, if this result proves robust, it suggests that “going big and fast” with QE is particularly effective in these conditions.
We are not out of firepower by any means, and to be honest it looks from today’s vantage point that we were too cautious about our remaining firepower pre-Covid. But, hindsight is a wonderful thing when you have it.
The Bank will not look at tightening monetary policy until there is significant progress on an economic rebound.
The committee does not intend to tighten monetary policy until there is clear evidence that significant progress is being made in eliminating spare capacity and achieving the 2% inflation target sustainably. This important step is intended to ensure monetary conditions do not tighten prematurely when there are some initial signs of an economic recovery.
Having more headroom for expanding quantitative easing could be preferable to fight future crises, Bailey says.
But one conclusion is that it could be preferable, and consistent with setting monetary conditions consistent with the inflation target, to seek to ensure there is sufficient headroom for more potent expansion in central bank balance sheets when needed in the future –to “go big” and “go fast” decisively
Andrew Bailey: QE will be ‘more long-lived’ than anticipated before
The structural drivers of low interest rates suggest the use of central bank balance sheets will be more long-lived than had been anticipated.
Quantitative easing, the purchase of billions of pounds of assets to boost the economy, may have been particularly important “during a period of market dysfunction”.
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