10 Sep Credible Policy-Making after Quantitative Easing
The increasingly errant forecasting of the Bank of England (the Bank) and the challenges presented by unconventional monetary policy (in particular, quantitative easing [QE]) which it has used to counter the UK’s fall into economic stagnation have placed its credibility under scrutiny.
This paper identifies the key threats to the credibility of the Bank of England, both now and in the near future, which it must address if it is to maintain efficacy in a world after QE.
- First, the Bank’s CPI inflation target is inadequate in an environment of increasingly volatile food, and upwards trending commodity prices.
- Second, following a comprehensive review, we find that the Bank’s stated exit strategy from QE — resting on a mirror-image asset sale and the issuance of Bank of England Bills — is unsatisfactory, particularly given the predominantly long-dated nature of the Bank’s bond-holdings.
- Third, the communication challenge presented by QE, and indeed any attempt to exit it, is straining the Bank’s communications framework. To be credible in this new world of multiple monetary policy instruments, the Bank needs to recognise that there is no one-size-fits-all strategy for central bank communication.
We present three recommendations to address these threats and restore the Bank’s credibility:
- A core inflation target would align the Bank’s tacit objective with its stated one,
- Committing to not selling the assets purchased under QE would clarify the Bank’s exit strategy, and
- Adopting a tailored approach to communicating different policy instruments would create a more coherent communications framework.