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MNI (London)
By David Robinson
     LONDON (MNI) - Bank of England Deputy Governor Jon Cunliffe said Tuesday
that when the MPC did start to unwind quantitative easing, it may do so very
     Cunliffe and other MPC colleagues, appearing before the Treasury Select
Committee, restated the line that Bank Rate was the preferred marginal policy
rate, with tightening coming through rate hikes before QE unwind.
     MPC member Ian McCafferty said that the Bank had done some work on QE
unwind, but more was needed. He added that the evidence from the US so far was
that markets had barely responded to the start of unwinding there, suggesting
that the effects of unwinding QE may be much less marked than when asset
purchases were carried out.
     McCafferty, who in an interview with the Times, had said the MPC should
look afresh at QE unwind, stressed that he too supported the view that Bank Rate
should initially be used for tightening and that he was not suggesting that QE
unwind should start any time soon.
     The MPC's guidance, set out back in 2015, is that QE unwind will only start
when Bank Rate reaches around 2.0%. On current SONIA curves Bank Rate does not
reach 2% over the next five years.
     MPC members have tended to steer clear of restating the 2% level. BOE
Deputy Governor Dave Ramsden said Monday at an event at King's College that 150
basis points of tightening would be needed to complete a normal tightening
     The thinking is that Bank Rate should be raised to a level from which it
can be materially cut before QE unwind kicks-in.
     The MPC members were grilled about what they thought was happening in the
labour market, with unemployment at historic lows but earnings growth at best
nudging higher.
     Cunliffe in a recent speech focussed on the Phillips curve, which assumes
an inverse relationship between unemployment and inflati
     "I don't have the evidence to say it has broken down ... It probably has
flattened," Cunliffe said.
     He voted against the November 25 basis point rate hike.
     Cunliffe said that given the uncertainty around what was happening Bank
Rate "is a tool you use with more caution."
     His colleague Michael Saunders said that the evidence was that recruitment
difficulties had intensified, with employers finding it harder to find the
workers they want. He said that earlier on there was evidence of employers
substituting relatively cheap labour for capital investment, but that more
recently capital investment was picking-up.
     On Brexit, Cunliffe and his colleague stressed that the impact was
uncertain and policy would respond as circumstances, and consumers, markets, and
business perceptions changed.
     Cunliffe said "What we need to do is stay nimble on monetary policy."
     Cunliffe said that in light of the uncertainty over Brexit, he did not
worry particularly about the costs of policy reversal. The MPC could hike then
cut if events merited it.
     Saunders said the implications of Brexit for monetary policy "could go
either way."
     The Bank sees Brexit as both a demand and supply risk, Saunders noted. If
it hits supply while consumers and business stay relatively upbeat, then it will
put upward pressure on inflation. 
     BOE Deputy Governor Ben Broadbent in a recent speech stressed that what
mattered was whether the implied pessimism of asset markets, notably the foreign
exchange market, and consumers over Brexit converged or diverged down the line.
--MNI London Bureau; tel: +44 203-586-2223; email:
[TOPICS: M$B$$$,M$E$$$,M$$BE$]
MNI London Bureau | +44 203-865-3812 |