MNI INTERVIEW: BOE's Credibility Points To No Dec Cut - Chadha

The Bank of England's Monetary Policy Committee should make clear its commitment to getting inflation back to target and hold the policy rate at its December meeting, given the November Budget avoided fiscal tightening, former National Institute of Economic and Social Research director Jagjit Chadha told MNI. 

"There's a tactical reason [not to cut at the Dec. 18 meeting] as well to send a signal to the markets that we're serious about inflation. Let's surprise them on the other side," Chadha said in an interview. "There can be quite a strong signal sent by not [cutting] particularly in light of the Budget and a sense that the job of disinflation is not yet complete," he added.

Markets currently price a 91% chance of a rate cut next week, but the vote looks likely to be very close following a 5-4 split in favour of holding in November.

For Chadha, Chancellor Rachel Reeves’ Budget contains "no real fiscal consolidation at all," with tax rises back-loaded to the end of the Parliament. "One must ask whether we really believe fiscal policy will be significantly tightened a couple years before the election?" he pointed out, while responding to such deferred tightening by cutting interest rates "would send the wrong kind of signals about the stance of monetary policy."

While the Bank takes fiscal policy at face value in its forecasts, MPC members are free to form their own judgements on it and Catherine Mann told lawmakers on Tuesday that back-loaded fiscal consolidations were unlikely to be delivered. 

PURPOSE OF MONETARY POLICY

The primary objective for monetary policymakers is to control inflation, Chadha said, insisting that "It's not the support of growth. Its primary objective is to secure price stability and should not be involved in a trade with economic growth."

Arguing that lowering Bank Rate affects the growth capacity of the economy in the long run is fallacious, he added, noting "moves in Bank rate have a temporary effect at best."

Chadha, now a professor at Cambridge, said he was concerned by “misguided” recent Bank of England research into the effect of quantitative easing on government debt servicing costs.

"If we start trumpeting the fact that we save debt service costs with monetary policies, we start to build up the case that the fiscal position is germane to the monetary policy decision: that it matters to the setting of monetary policy," he said. "It is not the Bank of England's purpose to change interest rates to save or, in other direction, increase government debt service costs."

COMMUNICATIONS

In November, the Bank’s Monetary Policy summary contained paragraphs by individual MPC members summarising their views for the first time, but Chadha thought these did not provide sufficient clarity about their thinking.

"It's a good step to have these paragraphs, but it's a bit word-soupy, in my view as it is hard to know what it means in aggregate, or what we used to say ‘net-net’,” he said.

He favours having MPC members being open about their own preferred rate path.

Each MPC member's vote "is going to be related to what each member imagines will be the path of Bank Rate over the foreseeable future. So why not tell us what path they currently have in mind?"

For these policymakers, "what really matters ... is your narrative. What is it you're trying to currently achieve with monetary policy,"  Chadha continued. "Answer that and you have a commitment to disinflate or inflate as you see fit."