Since Mark Carney took over from Lord King as governor of the Bank of England a year ago, the members of the Monetary Policy Committee have been unnaturally harmonious. Perhaps it has been a honeymoon period granted the new governor. If so, this has been a rather long honeymoon: the most recent meeting in June was the 12th consecutive time that there has been a unanimous vote by the MPC. Many commentators expect another 9/0 vote at this week’s meeting. By contrast, prior to Mr Carney’s arrival at the BoE, the MPC had a split 6/3 vote in five consecutive months over whether to increase asset purchases.
The sustained unanimity is all the more curious, as the strong improvement in Britain’s economy should have provoked more debate within the MPC than during the last months of the Lord King era. Perhaps this did not happen because Mr Carney introduced a policy of forward guidance which imposed an implicit discipline on the committee’s members. The credibility of guidance would be undermined by a diverse chorus of voices and votes from independent MPC members. So, the BoE may be shifting towards the US Federal Reserve’s model of near unanimity of voting behaviour which conceals real debate. If so, it will destroy a key strength of the British system and close off a subtle and important communication channel for markets.
Forward guidance served a useful purpose a year ago when the lack of confidence in Britain’s recovery was holding back household spending and business investment. This, alongside Mr Carney’s early speeches, effectively quelled the uncertainty of a new governor’s arrival. The business community was reassured that it would not be hit with rising rates in the near future, and it began to invest. Households likewise reacted with increased spending from their pent-up demand and the housing market began to recover, boosted by the government’s Help to Buy and Funding for Lending incentives. Taken together, these were appropriate and effective policies for their time.
But that time is now past. Unemployment is falling nicely and the housing market is in full swing, held back only by the extra constraints put onto mortgage lenders by the plethora of new regulatory requirements. The BoE’s focus on the nebulous concept of “slack” in the economy has replaced the equally unsatisfactory reliance during the Lord King era on the two-year horizon of the inflation forecast.
It is becoming clear that monetary policy is more a matter of judgment, albeit guided by data and forecasts, than a pre-announced reaction to specific data such as the unemployment rate or inflation forecast. This is why the judgments of a diverse and independent group of experts, weighted equally because none of them knows the future or the “true” model of the economy, is the best guarantee of good monetary policy. When they disagree with each other and vote accordingly, they reveal their independence as well as the inherent uncertainty as the need for a reversal in the direction of policy becomes more evident. Transparency is then enhanced when the MPC Minutes describe the nature of the dissent and when dissenting members are questioned by the Treasury Select Committee.
All of this enhances the seriousness with which MPC members decide on their votes. It would be a great shame to lose these strengths of the British system because MPC members feel some obligation to speak with one voice or start to enjoy the comfort of being shielded behind a majority. A test will come when the first interest rate increase is agreed. If it is a unanimous decision, following the long string of unanimous votes for no change, then independence and transparency have been compromised.
This commentary appeared in The A-list blog on FT.com on 9th July 2014