Jeremy Warner: What now for the Monetary Policy Committee?

Outlook: The Bank of England's Monetary Policy Committee begins its regular two-day monthly meeting today. With no interest rate decision to take – rates are already so low they cannot sensibly be cut further – the MPC may find itself struggling to fill the time. But though the Committee may have been deprived of its usual decision-making purpose, there's certainly plenty to discuss.

Any debate will be instructed by what's in the Bank of England's latest quarterly Inflation Report, due to be published next week. Is the Bank going to follow many outside forecasters into being gloomier about the economy than the Chancellor was in last month's Budget? And what's the outlook for inflation, which was showing stubbornly little sign of falling as expected in the most recent data?

Then finally, is "quantitative easing" (QE) working as it was supposed to, or does the Bank of England need to increase the pace of asset purchases to achieve the desired effect? Long-term interest rates fell markedly in anticipation of QE, but since then they have been rising steadily, albeit not yet back to where they were, on worries about the fast deteriorating state of Britain's public finances.

Already, the Bank is showing a significant portfolio loss on its purchases to date. Is it possible to have an exit strategy that doesn't further magnify these losses, or are the gilts and corporate paper being purchased as part of QE eventually just to be written off as a permanent expansion in the money supply?

But the most important question is the one referred to yesterday in a speech by Rachel Lomax, a former deputy governor of the Bank of England, to the Harold Wincott Awards for Financial Journalism & Broadcasting. During the "Great Stability" of the 10 to 12 years that led up to the banking crisis, monetary policy was a relatively unchallenging affair, or at least appeared so. It wasn't tough keeping inflation low when there was so much disinflation being exported out of the emerging market economies of the Far East and Eastern Europe.

Naturally, Ms Lomax thinks the Bank has also conducted itself reasonably well during the present crisis. Not everyone will agree with that, but what may be true is that the sternest test of monetary policy is yet to come. In attacking the crisis, an unprecedented amount of policy action has been taken in cutting rates and injecting liquidity. Keep this going for too long and the Bank risks stoking an inflationary boom that would eventually plunge the economy into an even worse crisis than the present bust.

Arguably, this was the policy mistake made by the US Federal Reserve back in 2003. In attempting to address the aftermath of the bubble, the Fed only succeeded in inflating new and much more serious bubbles in asset and credit markets. To judge by the present bounce in share prices, stock market investors think we are already away to the races again. Believe it if you will. Yet tighten policy too soon and any nascent recovery might be snuffed out.

Ever since Britain's ignominious exit from the ERM in 1992, UK monetary policy has been determined by targeting a particular rate of inflation. This seemed to work well to begin with, but over the last two years has manifestly failed to protect the country from financial and macroeconomic instability. Indeed, it may even have contributed to it. The question is whether supplementing inflation targeting with more effective prudential oversight of credit markets is sufficient or whether more fundamental reform to the way macroeconomic policy is conducted needs to be considered. Other than a little unfocused discussion of whether central bankers need, to use the jargon, to "lean against the wind" more than they have, there has been curiously little debate over the future of monetary policy. As a matter of some urgency, it obviously needs to begin.

Start your day with The Independent, sign up for daily news emails
ebooksA celebration of British elections
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

SThree: Trainee Recruitment Consultant - Swiss Banking and Finance

£20000 - £25000 per annum + Uncapped commission: SThree: Can you speak German,...

Ashdown Group: Marketing Executive - 6 month FTC - Central London

£25000 - £30000 per annum + benefits: Ashdown Group: An exciting opportunity f...

Ashdown Group: Junior Project Manager (website, web application) - Agile

£215 per day: Ashdown Group: Junior Project Manager (website, web application ...

Guru Careers: Software Engineer / Software Developer

£40-50K: Guru Careers: We are seeking an experienced Software Engineer / Softw...

Day In a Page

Fishing for votes with Nigel Farage: The Ukip leader shows how he can work an audience as he casts his line to the disaffected of Grimsby

Fishing is on Nigel Farage's mind

Ukip leader casts a line to the disaffected
Who is bombing whom in the Middle East? It's amazing they don't all hit each other

Who is bombing whom in the Middle East?

Robert Fisk untangles the countries and factions
China's influence on fashion: At the top of the game both creatively and commercially

China's influence on fashion

At the top of the game both creatively and commercially
Lord O’Donnell: Former cabinet secretary on the election and life away from the levers of power

The man known as GOD has a reputation for getting the job done

Lord O'Donnell's three principles of rule
Rainbow shades: It's all bright on the night

Rainbow shades

It's all bright on the night
'It was first time I had ever tasted chocolate. I kept a piece, and when Amsterdam was liberated, I gave it to the first Allied soldier I saw'

Bread from heaven

Dutch survivors thank RAF for World War II drop that saved millions
Britain will be 'run for the wealthy and powerful' if Tories retain power - Labour

How 'the Axe' helped Labour

UK will be 'run for the wealthy and powerful' if Tories retain power
Rare and exclusive video shows the horrific price paid by activists for challenging the rule of jihadist extremists in Syria

The price to be paid for challenging the rule of extremists

A revolution now 'consuming its own children'
Welcome to the world of Megagames

Welcome to the world of Megagames

300 players take part in Watch the Skies! board game in London
'Nymphomaniac' actress reveals what it was really like to star in one of the most explicit films ever

Charlotte Gainsbourg on 'Nymphomaniac'

Starring in one of the most explicit films ever
Robert Fisk in Abu Dhabi: The Emirates' out-of-sight migrant workers helping to build the dream projects of its rulers

Robert Fisk in Abu Dhabi

The Emirates' out-of-sight migrant workers helping to build the dream projects of its rulers
Vince Cable interview: Charging fees for employment tribunals was 'a very bad move'

Vince Cable exclusive interview

Charging fees for employment tribunals was 'a very bad move'
Iwan Rheon interview: Game of Thrones star returns to his Welsh roots to record debut album

Iwan Rheon is returning to his Welsh roots

Rheon is best known for his role as the Bastard of Bolton. It's gruelling playing a sadistic torturer, he tells Craig McLean, but it hasn't stopped him recording an album of Welsh psychedelia
Morne Hardenberg interview: Cameraman for BBC's upcoming show Shark on filming the ocean's most dangerous predator

It's time for my close-up

Meet the man who films great whites for a living
Increasing numbers of homeless people in America keep their mobile phones on the streets

Homeless people keep mobile phones

A homeless person with a smartphone is a common sight in the US. And that's creating a network where the 'hobo' community can share information - and fight stigma - like never before