Report to Treasury Select Committee from
Dr Andrew Sentance, External Member, Monetary Policy Committee
Last November, the Monetary Policy Committee
had already embarked on a significant easing of policy aimed at
combating the recession and heading off deflationary pressures.
It was clear that the UK economy had suffered a massive confidence
shock, reflecting the financial turmoil in September and October
2008. The global impact of this shock, coupled with the pressures
created by the "credit crunch" and the surge in oil
and commodity prices in summer 2008, set in train a contraction
in consumer and investment spending worldwide. It also triggered
a global stock cycle which led to sharp falls in world trade.
Monetary easing continued through the past year.
Bank Rate was reduced from 5% at the beginning of last October
to 0.5% in March. But it was not clear that this use of conventional
monetary policy would be sufficient to head off the risk of deflation
and put the UK economy back on a recovery track. So I strongly
supported the decision to embark on direct injections of money
through asset purchasesmainly government bondswhich
has come to be known as "Quantitative Easing" (QE).
One reason why I supported this policy of QE
asset purchases was that I felt it was very important for the
credibility of the MPC and our monetary framework to show that
we were prepared to use all levers available to stabilise the
real economy and keep inflation close to target. However, the
impacts of QE are highly uncertain, particularly with the operation
of the banking system impaired by the financial crisis.
A very important issue in the spring was to
calibrate the scale of the QE operations we might undertake. I
believed that we needed to make a bold start. This view was based
partly on the analysis of the relationship between monetary aggregates
and money GDP conducted by Michael Hume, my Monetary Policy Adviser.
It also reflected my expectation that a bold QE announcement would
have a significant positive impact on confidence in the business
community and financial markets.
I therefore supported the decision to announce
an initial tranche of £75bn easing in Marchcarried
out over three monthsand to extend the total to £125
billion in May. I believe that it is the stock of additional money
which is crucial to the impact of QE, and so the policy needed
to raise the stock of money as quickly as possible. There were
concerns at that time about the destabilising financial market
impacts of large asset purchases, though these were not realised.
As the QE programme has proceeded, the economic
news has improved. The deflationary risk has receded and evidence
of stabilisation and recovery has begun to emerge. In response,
I believe it has been appropriate to slow the rate of asset purchases.
I supported the majority view in August that our increased rate
of purchases should be £50 billion over the next three months,
slowing further to £25 billion over three months as a result
of the November decision.
THE UK ECONOMIC
The UK economy has suffered a severe recession
in late 2008 and early 2009. But the last six months have seen
a wide range of signs that the levels of output and demand may
be stabilising and recovery is now underway. In a recent speech,
I set out four key reasons why I believe the UK economy has started
to grow again: global economic recovery; improving business survey
evidence; indicators of rising consumer spending; and positive
evidence from the labour market.
In my view, this improving picture reflects
the combined impact of stimulus provided by monetary and fiscal
policy and measures to stabilise the banking sector in the UK
and overseas. The key issue looking forward is whether monetary
policy should continue to be relaxed when the economy is on a
recovery track, and at what point it might need to be tightened.
In the shortterm, the recession will continue to bear down on
inflation but if recovery gathers momentum, there will be upward
pressures on inflation both at home and abroad.
My recent speech highlighted two key uncertainties
surrounding the economic outlook: the pace of recovery in the
global economy; and the required domestic rebalancing as the public
sector deficit is reduced. In the mid-1990s, a competitive exchange
rate and reasonably healthy growth of domestic spendinghousehold
consumption and investmentenabled the UK economy to rebalance
in a similar way to the adjustment now required. Our current challenge,
however, is complicated by potential drags on private sector spending
from the financial crisis and balance sheet adjustment in the
household sector, which monetary policy will need to take into
My objective will be to set monetary policy
to keep inflation as close to the target as we can. But our recent
experience has been global demand and price volatility has greatly
complicated that taskwhich is likely to be a continuing
challenge for UK monetary policy in the years ahead.
A MPC MEMBER
Recent monetary policy challenges have made
it particularly important that MPC members explain their views
in the public domain and engage actively with the business community.
My activities over the past year include:
six public speeches, addressing a wide
range of global and national economic issues;
seven "regional visits" (including
the MPC Week in Scotland), normally lasting two days, organised
by the Bank's Agency networkto Wales, South-East England,
Northern Ireland, Scotland (twice), Liverpool and the North-East.
A visit to the South-West of England is also scheduled for this
24 talks to business groups and 22 company
visits, as part of regional visits and from direct invitations;
a wide range of interactions with the
news media, particularly the newswire services, including coverage
on Channel 4 News of my visit to Liverpool in May; and
12 talks at universities, colleges and
17 November 2009
1 Prospects for the British Economy after the Financial
Storm, delivered at Royal Holloway, University of London,
16 November 2009. Back
Copies are available on the Bank of England website. Back