When that Northern Rock thing first erupted, feathers were ruffled. For one hawkish economist, the ruffling was a little worse. For Sir John Gieve, Deputy Governor at the Bank of England, was the man at the bank responsible for financial stability, and when the treasury select committee got its carving knives out recently to go over the whys and wherefores of the whole affair, Sir John got a lot of the flak.
Maybe that’s why he appeared to morph earlier this month from hawk to dove. For Sir John, along with fellow MPC member, David Blanchflower, voted for the Bank of England Monetary Policy Committee to lower interest rates. As you will no doubt recall, rates were left on hold.
But the big question is this: what clues can we gather from the minutes of that meeting that were released yesterday? Can we read anything into the fact that normal dove, and Sir John’s fellow deputy governor, Rachel Lomax seemed to cross over into the hawk camp voting to keep interest rates on hold?
Well, actually, the minutes seemed to drop a pretty big hint that rates will be coming down very soon. They stated “since a reduction in Bank Rate was not widely expected this month, there was a danger that an immediate cut would be misinterpreted, precipitating an unwarranted further fall in the market yield curve.”
In other words, the MPC feared that an unexpected rate cut would induced panic. Instead, they want to wait until markets expect a cut, and then comply with the wishes of investors. Since markets do seem to expect a rate cut soon, it would appear the odds of a rate cut next month have risen enormously.
The Minutes dropped another big hint too: “The central projection in the Inflation Report was conditioned on a market path which included cumulative interest rate reductions of 50 basis points over the next 12 months and a little more thereafter.” So that’s two quarter of a per cent cuts, and then one more, some time later.
It seems that Good King Mervyn, when he next looks upon the Feast of Stephen from an MPC meeting is likely to announce an early Christmas present: a rate cut.
Even so, with oil up high, with food inflation up, with manufacturers upping prices, it does seem that yesterday’s minutes revealed a change in tack by the Bank of England, and that it is planning to set aside worries about inflation, and just focus on avoiding an economic slowdown, which by the way is contrary to what it is supposed to do. But then again, it seems likely it would only make such a decision to de-prioritise inflation under political pressure, and since the bank is independent, and would never be influenced by the government in the midst of their semi-annis horribilis, that analysis must be wrong.
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