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MNI INTERVIEW: BOE Seen Choosing Flexible Tightening Strategy

MNI (London)

Doubts over sustained inflation could argue for a flexible approach to tightening, NIESR Research Manager Corrado Macchiarelli tells MNI.

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The upcoming results of the Bank of England's review of its tightening strategy could see it decide to adjust the mix and sequence of rate hikes and reductions in bond purchases depending on whether higher inflation threatens to become sustained, a senior researcher at the National Institute of Economic and Social Research told MNI.

While there has been speculation that the Bank could announce it was lowering the threshold for Bank Rate, currently at 1.5%, at which it would start unwinding quantitative easing, thus allowing rates to be used as the primary tightening tool, NIESR Research Manager Corrado Macchiarelli said there was a strong case for policymakers to agree a formulation that emphasises flexibility.

"If they believe inflationary pressure to be temporary … I guess they would go for an interest rate hike with balance sheet reduction to follow," Macchiarelli said, speaking ahead of the publication of the review, which could come in the August Monetary Policy Report. "If they suspect inflationary pressures will be sustained there will be no question that they will do QT. There is state contingency in the interplay between those two measures."

The question of whether the current inflation overshoot will prove to be fleeting or not was central to recent speeches by BOE Monetary Policy Committee members Ben Broadbent, Jonathan Haskel and Michael Saunders, with the differences in emphasis and stresses on the uncertainties showing the fluidity in the committee's thinking is on the subject at present.


An important component of how quantitative easing has worked, according to academic literature, has been through the signalling channel, so QT should have the opposite effect by demonstrating a commitment to keep policy tight for a prolonged period.

"QE is normally a very long-term commitment, a strong commitment, to keep monetary policy loose. So if they start QT that means they really are committed to starting tightening in a very decisive manner," Macchiarelli said. "This does not exclude the possibility of re-adjusting the size of the balance sheet later on, however."

Raising Bank Rate, which can be re-adjusted rapidly, might only signal an aim to tackle short-term pressure, he added.

The Bank faces pressure toprovide more details of its view of the likely effects of QT, following criticism by the House of Lords Economic Affairs Committeeover its failure to publish detailed estimates of the effects of later rounds of QE, but Macchiarelli expected it to continue to keep some information to itself. In particular, the BOE is unlikely to publish estimated changes in the excess yield that investors require to commit to hold a long-term bond, a calculation crucial to estimating the effectiveness of central bank bond transactions.

While the New York and St. Louis Feds produce their own, separate estimates of term premia, the BOE does not have the U.S. central bank's decentralised structure, so any similar publication would feed market speculation, Macchiarelli said.

"I understand why the Bank of England may not want to publish those estimates because they convey some signalling and some information," he said, adding that they "don't want to put a number on something that is by nature very uncertain and model specific."