At a time when the gilt market is desperately interested in the future of Quantitative Easing, the Prime Minister yesterday sent a shot across the bows of the Bank of England’s MPC by saying that ending QE would put the UK into a “very deep recession”. Whilst his words were, on the face of it, aimed at the Conservative Party’s perceived reputation as Great Depression puritans who would remove all forms of stimulus as quickly as possible (see here for David Blanchflower’s view that the Cameron/Osborne plans would push us into a “death spiral of decline”), the remarks are unhelpful for the Bank of England. “If we removed stimulus now, stopped the quantitative easing we would be back to where we were”, he said. The Bank will decide on an extension, or end, to QE at the 5th November MPC meeting, and it must be remembered that this is a form of monetary policy delegated to the Bank in the same way as interest rate policy is. Given some stabilisation in the UK’s economic indicators over the past couple of months (house prices, retail sales, business survey data) this decision is going to be a very tough call, and we still walk the tightrope between inflation and deflation. Today’s CPI data came in at 1.1% year-on-year, just above the level where the Bank has to write to the Chancellor explaining itself – although this should edge up later this year as the base effects from lower energy prices fall out. I can’t imagine that the Bank was pleased with this pressure, although Mr Brown did state in an interview on Bloomberg TV that QE is a Bank of England decision (shortly after saying that “the right time to do this is when we are absolutely sure of a recovery”, so no pressure there then).
Goldman Sachs surveyed its clients yesterday afternoon on the outlook for QE. Only 21% thought that November would see the end of the programme, with the vast majority seeing a further extension (nearly 30% thought that the total would rise to above £250 billion, comfortably mopping up the entire predicted gilt issuance for this financial year, and more!). No wonder gilts have been rallying over the past few days, and no wonder sterling is falling.
Elsewhere, we had a team outing to see the new David Hare play, The Power of Yes, at the National Theatre. The Bond Vigilantes were “clocked” as evil City workers within seconds of sitting down, but made it out alive after some robust discussions with our fellow audience members. The play itself gets a modest 6/10 – the first half is dull for anybody who’s read a paper over the last two years, but it does improve, and there are some interesting interviews with people close to the action (we learn that Mervyn King panics if there are transport problems when he’s travelling on business, and that Fred Goodwin had to be shocked into agreeing to apologise at his Select Committee hearing – the exact wording is not appropriate for a family bond market blog). But bankers get the entire blame for the crisis, without any thought for the demand side of the credit expansion (i.e. our lust for flat screen TVs and buy-to-let mortgages). The dealers are evil, and the addicts blameless. The only time the role of the wider public is examined is when Hare examines the demutualisation of building societies into banks, which led to a change of role from piggy banks that lent to solid homebuyers into quasi-investment banks driven by growth. This demutualisation wave was driven by a greedy public – a couple of thousand pounds of shares here and there (worthless now in some cases), and we lost our local, conservative lending institutions. Mind you, the remaining building societies didn’t escape the rush into toxic assets (the Dunfermline BS had its assets split up by the authorities in March this year). You can read real reviews here (The Telegraph and the Guardian). If anybody else has seen the play, feel free to leave your comments below.