The Bank and Brexit

On a regular basis representatives of the Bank of England meets with the Treasury Select Committee, a body of MPs that examines the expenditure, administration and policy of HM Treasury, HM Revenue & Customs, and associated public bodies, including the Bank of England and the Financial Conduct Authority”. Today there has been a hearing at the Treasury Committee on “The economic and financial costs and benefits of UK’s EU membership”, in which governor Mark Carney gave evidence.

At the meeting, Carney was accused of being “pro-EU”, apparently because he wrote in a pre-hearing letter to the committee: “EU membership reinforces the dynamism of the UK economy”. As definitions and details are all important, particularly in the Brexit debate, thankfully the report then states: “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. ”

It’s hard to imagine how an evaluation of the costs and benefits of the UK’s EU membership could avoid being pro-EU whilst making statements about the benefits of EU membership, and highlights the difficulty of providing any kind of appraisal in these politically-charged days. Nonetheless, it is important to do so, and also important to go to the source and read/listen to what’s happened. The link above is to the pre-hearing report put together by the Bank, and is well worth reading on the costs and benefits of EU membership.

School Trip to the Bank of England

Yesterday a group of us from the economics department went to the Bank of England in London. We spent time in the Bank of England Museum before having a talk about the history of the museum, bank notes and gold.

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The museum is a number of things, but perhaps most obviously it’s a museum of economics; in the main hall there’s a number of displays talking about the monetary system; definitions of inflation, for example:

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It’s hugely important to have quick and easy definitions for terms like inflation, money, and quantitative easing. If nothing else, you can at least prove your friends wrong when they make grand assertions about economic matters.

The opening hall is full of exhibits that make the point that monetary policymaking is hard work:

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Here, you can pull up and down the lever on the right to affect where the ball is, between deflation and inflation of 10%+. The problem is that on the left there’s an “economic shock” which makes it very hard to ever get the ball to 2%. Not too dissimilar to the outcomes of actual inflation over recent years…

What is an economic shock? Another exhibit had genuine BBC news footage from throughout recent decades from events such as the oil crises in the 1970s, the stock market crash of 1987 and the UK’s exit from ERM in 1992 – all huge events that had considerable impacts on wider economic activity.

Perhaps the most exciting exhibit is a bar of gold – value close on £300,000! As you can see, high security:

gold-selfie

 

The talk we had talked through the history of a state bank and central bank and how it developed, along with the development of bank notes from bits of paper to the soon-to-be plastic £5, £10, £20 and £50 notes we now use.

All in all, a fascinating museum, educational and good fun at the same time. If you are in London and within easy reach of the Bank, I’d highly recommend getting along – it’s free!

 

Yesterday’s News: Carney and the EU

This week the Bank of England Governor, Mark Carney, gave a speech on the EU in Oxford. It’s well worth reading the whole thing, rather than the various responses to it. It’s not particularly long, and there’s even a bit of humour injected in places.

Firstly, why does it matter that the Bank of England Governor has given a speech? It matters because he is head of the institution tasked with carrying out monetary policy – what happens to interest rates, essentially, to keep inflation at around 2%, and also financial regulation – to try and ensure another financial crisis doesn’t occur.

What is the context? As you’ll be aware, the UK is holding a referendum by the end of 2017 on its membership of the EU. The UK, as a very open economy, is highly affected by international events – both good and bad. At times, high demand from Europe and elsewhere has helped drive UK growth, but at other times instability in neighbouring countries has inhibited our growth. Additionally, it means our policy decisions affect others in the same way that many decisions we make on a crowded train impact those who happen to be sat/stood near us.

What did Carney have to say? Essentially, he said that the founding principles of the EU: freedom of movement of goods and services, capital and labour, have been a good thing for the UK economy. These are arguments we’ll cover in much more detail next term, but here’s some food for thought in the meantime. However, he did add caution (something Eurosceptics have been quick to seize upon): financial regulation may threaten the UK economy in the future, as may the unwillingness of other European nations to reform and become more competitive.

All things we’ll be talking about in much more detail in the Spring: see you then!

Bank of England keeps interest rates on hold

On the first Thursday of the month (or the second, it seems, if the first is the 1st), the Bank of England’s Monetary Policy Committee meets to decide on monetary policy in the UK. At midday on that Thursday, they announce what they have decided to do; it’s just been announced that interest rates will remain at 0.5%, where they have been now for over five years. Here’s the entire history of the Bank of England “base rate”, which is the rate it sets monthly:

You’ll note that the rate reached 0.5% before 2011 (right at the end of the chart), and it’s still there. It’s one of the longest spells without a change for decades.

The MPC is a group of economists, both ones that work for the Bank of England, and a group of external members, often university professors and economists that work in the private sector. The idea is that they apply a wide range of expertise and experience on the UK economy to policymaking decisions. They are trying to hit a target of 2% inflation, that the UK government sets for them, but at the moment inflation is around 0, hence below target.

Prior to this, inflation spent a number of years above target, and perhaps as a result, there have been a number who have called openly for a rethink about the Bank of England’s role in policymaking, not least the new Labour Shadow Chancellor of the Exchequer.

We’ll consider monetary policy in about week 8 or 9 next term, once we’ve considered the various constituent parts of what the MPC thinks about when making decisions: inflation, growth, consumption, investment, money, interest rates and banking.