The monetary policy committee is a master of policy inaction
Today’s number to remember is 86.
That is how many monthly monetary policy committee (MPC) meetings will have passed without a change in interest rates, assuming one does not happen today. Of course, I could be wrong in expecting no change from the MPC – along with every other economist on the planet.
When there is ultimately a rise in interest rates, however, I might give a live musical performance outside the Bank of England – strumming my guitar in celebration.
It is tempting to speculate what the MPC now does in its meetings, when the outcome is so predictable. Perhaps they could start listening to music and then publish their playlist selections in the minutes.
Last summer, the theme song might have been “You Ain’t Seen Nothing Yet” by Bachman Turner Overdrive. The 1974 hit from the legendary Canadian band conjures up the sentiments of their fellow countryman Mark Carney in his Lincoln speech last July.
His sub-text then was that a rise in interest rates could occur around the turn of the year. So all we had to do was wait a few months and the Bank would act.
The playlist for the MPC meeting might now have shifted to that other 1974 hit song from Stevie Wonder – backed by the Jackson Five – “You Haven’t Done Nothing”.
The MPC haven’t done anything to change interest rates for 86 meetings. And current market expectations are that it could well be 100 meetings or more before we see any upward move.
Could interest rates be cut further? To 0.25 per cent, zero or even into negative territory?
There are some MPC members who may be thinking in that direction – but I don’t think that will happen, if it ever does, this month.
The key issue for the MPC now is to keep a stable hand on the tiller and not do anything to rock the boat as we prepare for the EU referendum. That is a very sensible course of action, to avoid the Bank of England getting embroiled in a highly charged political debate.
Looking ahead, however, we should be preparing for gradual rate rises if there is a Remain verdict in the Referendum.
Read more: Carney’s grilling at the House of Lords
In the event of a Leave vote, monetary policy will have to stabilise the economy as best it can. If the pound goes into free-fall, higher interest rates could come quite quickly onto the agenda. Or the Bank could choose to launch more QE or cut interest rates further.
A Leave vote would shock the MPC out of its current mode of masterly inaction. But in the absence of such a shock, I fear that the Committee will be too slow to raise rates, and we will eventually regret the consequences.