Today Bank of England Governor Mark Carney is going to be interviewed by the Treasury Select Committee on the subject of the monetary policy implications UK referendum on European Union membership. To a limited extent he has got his retaliation in first as the Bank of England made this announcement yesterday.
The Bank of England is today announcing that it will offer three additional Indexed Long-Term Repo (ILTR) operations in the weeks around the EU Referendum.
These operations are additional to the regular ILTR operations which will continue to take place once a month.
As usual, the Bank will continue to offer liquidity insurance via its other facilities, including running its regular weekly US Dollar repo operations, throughout this period.
Central banks do love their acronyms don’t they? In essence he is making sure that the banking system at the wholesale level does not run out of cash and the full description of an ILTR is below.
An ILTR operation is a market-wide auction of central bank reserves which provides banks, building societies and broker-dealers with an opportunity to obtain liquidity against the full range of collateral eligible in the Sterling Monetary Framework.
On the one hand this seems sensible as it provides security and a backstop. Although personally I do wonder why it thinks they might run out and of course others take the opportunity to scaremonger as The Guardian has done here.
Bank of England pledges extra funding as EU referendum fears grow
Fears is rather a general concept isn’t it as both sides of the debate have fears?!
Foreign exchange reserves
This is an area that you might reasonably think could be called into action. After all a possible short-term disruption to the value of the UK Pound £ is exactly what they are supposed to be used for. Already we have seen swings in the value of the £ as the Brexit debate has developed although some care is needed as the media seem to blame it for falls then forget the subject if it rises. Of course there are other influences too which in an era of lazy journalism get forgotten and ignored.The fall below US $1.40 was blamed in the media on Brexit fears but the subsequent rise to above US $1.42 has seen an outbreak of silence.
Back on January 15th in my response to the McDonnell Review on monetary policy I suggested this.
The position here needs clarifying as I have read in the past that both the Bank of England and the government could use the reserves and now note this from the UK Government website.
Specific prior authority from Treasury Ministers is required for intervention designed to influence sterling exchange rates using the EEA, or for EEA participation in concerted intervention in support of any other currency.
So we could have the Bank of England changing interest-rates in response to currency moves whilst the government decides on intervention. That is a recipe for a shambles especially if the government at that time was in flux, which should we vote for Brexit it might be.
What might happen?
Oxford economics have given this a go and suggested this.
Market pricing suggests that sterling could initially fall by around 15% before recovering some of its losses, while the heightened uncertainty would also be expected to drive a sharp drop in equity prices in H2 2016.
There is plenty of spurious accuracy there but the overall theme of exchange-rate volatility seems to be likely. For completeness I presented their GDP forecast but I would suggest taking it with the whole salt cellar rather than just a pinch of salt.
A scenario run on the Oxford Global Model suggests that Brexit would leave the level of UK GDP 1.3ppt lower by Q2 2018 compared with our baseline forecast that the UK votes to stay in the EU.
Governor Carney has written a letter to the Treasury Select Committee and the bit which will no doubt lead to considerable argument is below.
First, to the extent it increases economic and financial openness, EU membership reinforces the dynamism of the UK economy. A more dynamic economy is more resilient to shocks, can grow more rapidly without generating inflationary pressure or creating risks to financial stability and can also be associated with more effective competition.
This is a repetition of what Mark Carney and the Bank of England reported last October and whilst some of the language is neutral this bit plainly is not.
EU membership reinforces the dynamism of the UK economy
More heat than light? Maybe but the Governor may regret this bit which reinforces the theme and the emphasis is mine.
The UK has become much more open over the past forty years and is now amongst the most dynamic advanced economies in the world. There are number of reasons for this, but the Report acknowledges that the EU is likely to have contributed by establishing the world’s largest single market with free movement of goods, services, capital and labour.
Also after confessing to having “fireside chats” with the Prime Minister Governor Carney seems to have become something of a cheerleader for his settlement.
The Settlement addresses the issues the Bank identified as being important,
In essence the Bank of England is manoeuvering itself to be on the side of the UK establishment which if we move on from this specific debate has its other problems. Those who accuse Governor Carney of being something of George Osborne’s poodle will hardly be discouraged.
The battle of the Governors
There does seem to be a divergence between the previous and present Governor of the Bank of England. Mervyn King has been outright critical of the Euro. It was an interesting view that its continuation might be more of a danger than its collapse! To be fair to Mark Carney he should avoid gratuitous criticism of other countries monetary systems but there does seem to be a gap.
Does that help? Unfortunately as both have a track record of being wrong it does not help much.
We find that useful phrase “Never believe anything until it is officially denied” in play one more time as we review Governor Carney stating this.
We will not be making, and nothing we say should be interpreted as making, any recommendation with respect to that decision.
He was accompanied by Sir John Cunliffe who described the Prime Minister’s negotiations as “both significant and material” but then with his track record who should be surprised?
Before joining the Bank, Jon was the UK Permanent Representative to the European Union, effective from 9 January 2012. From July 2007 to December 2011, he was the Prime Minister’s Advisor on Europe and Global Issues and the UK Sherpa for the G8 and G20 and the Cabinet Office Permanent Secretary responsible for EU coordination.
Conflicted? Well of course the alternative argument is that he has plenty of experience in that area and it is true it goes back a long way,decades in fact.
He led the Treasury’s work on……. European Monetary Union;
This is of course one of the problems I have highlighted before about the way that the UK Treasury has mounted something of a takeover of the “independent” Bank of England.
As to the debate itself then let me use the songs of Carole King. Any light on the Brexit economic debate is.
So far away
Whereas for any recovery of the independence of the Bank of England.
And it’s too late, baby now, it’s too late,
Though we really did try to make it.
Somethin’ inside has died, and I can’t hide,
And I just can’t fake it, oh, no, no.