Notes From Underground: Who Knows What Lurks In the Mind Of the BOE, the Shadow?

Tomorrow the Bank of England’s Monetary Policy Committee meets to decide interest rates. Governor Mark Carney has recently confused markets by saying that interest rates would probably rise sooner than forecast. Then Mr. Carney changed directions by following the FOMC and suggesting that the slack in the labor market would allow the BOE to stay the present course and keep interest rates at present levels for an extended period. Overnight rates are currently at 0.50% and with the British pound strengthening against most currencies the BOE is expected to maintain the status quo.

Over the weekend, U.K. economic blogger David Smith wrote a piece concerning the vote of the Shadow Monetary Policy Committee (SMPC), which acts as a shadow to the actual MPC and offers its own measured opinions on monetary policy. In a recent vote, the SMPC opined in an 8-1 vote that interest rates OUGHT to be raised at Thursday’s official meeting. Five of the voters actually wanted a 50 basis point increase. In a very poignant statement defending the need to raise rates the shadow group wrote: “The Bank should set monetary policy appropriately and the allow the markets to determine how to allocate credit.”

The SMPC certainly makes a very powerful argument for a rate increase but with Governor Carney’s intense focus on the BRITISH POUND it is doubtful that the BOE will act to raise rates even as growth accelerates in the U.K. Even more important for Mark Carney will be last Thursday’s large cut in rates by the Swedish Riksbank. There won’t be a change as the world’s banks are leery about straying from the herd, but the shadow does provide interesting thoughts about the financial system and the allocation of credit.

***The struggles between the BIS and some central banks is heating up as the key adviser on global finances is miffed at being ignored by its constituents. The BIS is on record suggesting that the FED, BOE and others raise rates to prevent financial instability. Janet Yellen and Mario Draghi have pushed back against the BIS by proclaiming that financial risks are best dealt with through the use of MACROPRUDENTIAL REGULATORY TOOLS, rather than using interest rates that have too broad an impact. In a WSJ article from Sunday July 6, “Banks Face Added Capital Requirements” (Dendrinou and Enrich), the reporters note that the Basel Committee on Banking Supervision could create measures that would remove the long-held policy that sovereign debt is considered a risk-free asset.

If the Basel III regulations required banks to hold reserves against sovereign bonds that are deemed risky, European banks would be forced to raise a huge amount of capital. If banks were forced to hold reserves against sovereign debt, questionable governments would have to pay more to borrow (think Spain, Italy, Portugal and others). Janet Yellen and Mario Draghi may have thought little of BIS recommendations about financial stability, but the BIS also has tools in which to make central banks pay heed.

***Open message to U.K. Prime Minister David Cameron from NOTES FROM UNDERGROUND: Mr. Prime Minister, you have recently suffered a severe set back in  Brussels as Angela Merkel supported Jean-Claude Juncker as the head of the EU political entity. Mr. Cameron, you suffered because the other nations of Europe punished you for failure to cave in to British politics and call a referendum on the issue of full entry into the EU in 2017. In a move of revenge against the Juncker Eurocrats, it is time to begin a media campaign targeting the German populace and asking why Germany has never held a referendum on its role as paymaster and creditor of the EU project. Last year, Otmar Issing,the respected economist and past Bundesbanker, wrote an op-ed questioning the “unlimited ” support of Germany’s taxpayers for all the peripheral nation debt. Mr. Issing cited the long-held view of the United States, “No Taxation Without Representation.” If i were David Cameron, I would bring the question forward to the Bavarian Burghers.

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One Response to “Notes From Underground: Who Knows What Lurks In the Mind Of the BOE, the Shadow?”

  1. asherz Says:

    The policies of the Yellins (and her predecessors), Draghis & Co. are like the man who has all the symtoms of a terminal disease but refuses to go to the doctor. “What I don’t know won’t hurt me.” The BIS is his wife and telling him to go to the doctor today.

    Saying that macroprudential tools that are more spoken about than implemented while keeping interest rates at zero keeps the banks and markets happy for now. But the malignancy keeps spreading.

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