The MPC may be forced to turn to more unconventional policy tools to protect banks - ITEM Club

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Nida Ali, economic advisor to the EY ITEM Club, comments on today’s monetary policy decision.

  • The decision to expand QE was always likely, despite the recent run of positive data 
  • Purchasing more gilts this time round may have a limited effect due to present circumstances
  • The UK's financial stability is threatened by the Eurozone crisis and the MPC may be forced to turn to more unconventional policy tools to protect banks from unwanted shocks to the financial system 

“Today’s monetary policy decision was to be expected as the previous round of purchases had been complete and the wider outlook is still weak and uncertain. This is despite the better run of positive data in the past week or so.
 
“It has been indicated that the money will continue to be used for purchasing gilts with the aim of depressing gilt yields further and encouraging investors to purchase other assets. However, we are very sceptical about the effectiveness of this approach as gilt yields can hardly be depressed any further and the scope for asset prices to rise is limited in the uncertain economic environment.
 
“The Eurozone crisis poses a significant threat to the UK's financial stability. It is imperative that banks are sufficiently protected against any unwanted shocks to the financial system that may result from adverse developments in the peripheral countries. The MPC introduced the Extended Collateral Term Repo facility in December which provides liquidity to banks in an auction format against a wide range of collateral. This is a step in the right direction.

“If the Eurozone crisis escalates further, the MPC may be forced to turn to more unconventional policy tools, such as acting directly to ease the borrowing costs of banks or provide additional temporary liquidity to the banking sector, as the ECB has done recently.”