19 Aug 2009

Mervyn’s money mania means Cameron need not worry – yet

Forget the voices suggesting interest rates might creep up in the near future.

This morning revealed the reality that the Bank of England nearly voted for even more creation of its funny money.

Three members of the nine-member committee that decided our interest rates, and now conjures magic money at a keystroke, felt that this month’s decision to pump £50bn into the economy was too small.

Until now decisions on this highly unconventional policy have all been unanimous. More importantly, it suggests that the Bank of England is far from finished with this policy. All that means it is too early to think of rates going up in the near future, even given the stickiness of yesterday’s inflation figure.

Governor Mervyn King was also outvoted by his committee. Remarkably, he was outvoted not for being too hawkish (i.e. worrying more about inflation) but because he was too dovish. This is a first.

So King is more worried about the risks to the UK economy than the rest of the monetary policy committee. In Bank-speak: “The potential adverse consequences of adding another large monetary stimulus might be less severe than the possible costs of acting too cautiously.”

Professional economists are all over the place in trying to predict what the Bank does next. And today’s minutes show that the Bank itself is increasingly unpredictable. This is not necessarily a bad thing. This is how we depicted QE before it happened in January –

We are conducting the biggest economic experiment in British history, so don’t expect much predictive power from the economist. But the UK is pushing the policy of printing money much further than any other comparable country, and our chief money man wants to push it yet further.

The most tangible result, though, is on the government debt markets. The Bank broadly agrees with this intriguing IMF staff report suggesting that QE has lowered the interest rate paid by the government on its debts by as much as 0.4 percentage points.

This is huge. It is one of the reasons why the DMO chief told me in May that the credit rating downgrade feared by David Cameron might have only an “imperceptible” impact on Britain’s funding costs.

Remarkably we are heading towards £200bn worth of government debt being bought by the Bank of England. So what is the total issuance of UK gilts 2009-2010? £220 billion.

So Cameron should not be worrying about us going bankrupt any time soon. We have a ready buyer for our government debt right now. It’s what happens after that’s a little hazy.