The Bank of England has got its swagger back. After watching helpless as the economy dived into recession a year ago, Paul Fisher, the head of markets, insists the Bank’s extraordinary cuts in interest rates and its injection of money into the economy through its quantitative easing programme are now working. The Bank is back in charge.
“Personally I feel much more confident now that the asset purchase programme is having the scale and speed of impact that we would have hoped for when we started [in March]”, he says.
The Bank’s ‘Mr QE’ adds: “Even two or three months ago it was still very difficult to find hard evidence which would justify that confidence, even though that is what we believed; now I think it’s much clearer.”
Both asset prices and optimism have risen due to the programme, he points out, before citing another development he believes should be credited to QE. He says it has improved the ability of big companies to raise funds in the bond market, enabling them to pay small companies and therefore alleviating the corporate cash flow problem and stopping redundancies. Although the level of unemployment is “dreadful” he insists it is “just not as bad as it could have been, given a 6 per cent fall in output. And that may be one of the aspects of the asset purchase scheme working”.
How can he be so sure that quantitative easing is working? Like others in the Bank, he struggles to state the exact effect of the policy, but he argues this uncertainty is no different from the problem the Bank always faces when it changes interest rates. “You never know what would have happened without the policy change. And so, on a scientific basis, you can never precisely calibrate what the impact of any policy change is; and that is certainly true here”.
That means the monetary policy committee will have a tricky decision next month as to whether to continue purchasing government bonds or call a halt. Mr Fisher sticks to the standard line that the outcome of MPC meetings is never predetermined. “People obviously are expecting us to stop at some stage, and so to a degree it will be priced into the market. Whether we’ll [stop] in November or at some later date may be uncertain.”
For him, however, the path of the economy since the last inflation report is much as the Bank predicted in August. Asked whether its forecast then appears to be broadly on track, he says, “yes it is,” before quickly returning to the official MPC mantra: “I mean, obviously we haven’t cleared the [November] forecast round yet”.
One thing that has changed since August has been that sterling has been on the slide again, a movement often attributed in the markets to Bank attempts to talk the pound down. Rejecting this view, Mr Fisher maintains all the Bank’s communications on sterling have related to the past. “I don’t think there was any intention to make forward-looking comments,” he says.
The most important aspect of the economy in his view is that output looks set to be about 8 per cent lower than the Bank forecast in summer of 2007 for the foreseeable future.
How much of that output is gone for good? “A large chunk; a pretty large chunk,” he says, adding: “This is never completely permanent, but for the period of the forecast horizon there would be a reduction in supply.”
Mr Fisher argues there is still sufficient spare capacity in the economy to mute inflationary pressures, giving companies little leeway to raise prices and making employees think twice before demanding large pay rises.
In the meantime, he is pleased the recovery is broadly on track. Even with lasting scars from the recession and inevitable bumps in the road ahead, he says, “the conditions are all there for that turn in the economy”.