UPDATE: BOE Cunliffe: No QE Unwind Soon; May Be Very Gradual

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

gradually.

     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

cycle.

     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: david.robinson@marketnews.com

[TOPICS: M$B$$$,M$E$$$,M$$BE$]