March 05, 2021

Haskel - Remarks on challenges to the economic outlook

  • "We expect a strong recovery (from a low base), and to ultimately fare better in this recovery than we did after the financial crisis: returning more quickly and closer to the pre crisis trend."
  • "time out of the labour force through the government’s furlough scheme (Coronavirus Job Retention Scheme) in 2020 and 2021, and higher unemployment in 2021 and 2022, will reduce the accumulation of human capital through less ‘learning by doing’."
  • "while it is remarkable that in recent months (according to the ONS BICS survey) almost 50 percent of the UK’s active labour force was working from home, a net balance of firms across the vast majority of industries does not intend to use increased homeworking as a permanent feature going forward, nor do they think homeworking has improved productivity."
  • "even under these extreme circumstances, the change in the share of aggregate hours in this industry [accommodation and food] in 2020 is actually small relative to the longer run shift in manufacturing. Putting this together the prospects for large COVID specific structural employment changes are probably small, at least in an economic sense."
  • "insolvencies actually fell over 2020. This is in large part due to capacity constraints on administrators and courts caused by the pandemic, such that we can expect a level of pent up insolvencies to emerge."
  • "the latest data from the ONS would suggest that 25% of the private sector labour force is currently on furlough. Cominetti et al (2021) estimate that of these furloughed workers, half a million have been on furlough for at least six months. The extent to which these schemes have averted rather than simply delayed rising insolvencies and unemployment remains, for me, an open question."
  • "Approximately £125bn of extra savings accumulated between March and November 2020 as consumption fell due to COVID related restrictions, while incomes were supported by government employment schemes. Due to continued support and restrictions, this stock is set to rise even further and could approach £300bn by the time restrictions are fully lifted. To put this into perspective, given there are approximately 30 million households in the UK, that £300bn translates into an additional £10,000 of savings per household on average (were the savings to be distributed equally"
  • "We also asked households who had accumulated extra savings which constituted 30% of households what they intend to do with these extra savings in the 2020H2 NMG survey. Only a minority of those who had accumulated extra savings indicated they would use those savings to finance high spending, whereas around 70 percent responded they would save it in the bank."
  • "given the endogenous nature of supply and the temporary factors underpinning that movement into excess demand, namely fiscal spending on health and some pent up demand, I see relatively little risk of sustained above target inflation over this period."
  • "risks to activity remain skewed to the downside. As I have consistently argued, risk management considerations dictate that policy should lean strongly against downside risks to the outlook and I remain open to the possibility that the economy might need further support to return inflation to the target sustainably... That is why, following the completion of the PRA’s initial consultation with regulated firms regarding the setting of zero or negative Bank Rate, I supported the decision alongside my colleagues to request that the PRA further engage with firms to ensure they start preparations to be ready to implement a negative Bank Rate at any point after six months."

February 26, 2021

Haldane - Inflation: A Tiger by the Tail?

  • "In its latest forecasts in February, the MPC judged there to be a one-in-three chance of inflation lying below zero, or above 4%, at the two-year policy horizon"
  • "There are few, if any, historical precedents to help judge the response of the economy to this scale of shock and degree of policy stimulus. And the costs of getting these judgements wrong could be significant."
  • "In a highly-uncertain environment, where robust policy may call for avoiding tail outcomes rather than optimising around a central path, this scenario-based or risk-management approach seems particularly valuable."
  • "For many years, the inflationary tiger slept. The combined effects of unprecedentedly large shocks, and unprecedentedly high degrees of policy support, have stirred it from its slumber. In this environment, the tiger-taming act facing central banks is a difficult and dangerous one."
  • "In the US and euro-area, the price level has drifted below this path over the past decade, as inflation has undershot a 2% target. Cumulatively, these deviations have been significant, with the level of prices in the US and euro-area over 20% below its 2%-consistent path."
  • "Faijgelbaum and Khandelwal (2016) estimate that global trade integration has lowered the price of the typical household consumption basket by between a quarter and two-thirds – a huge effect."
  • "The IMF estimate the output gap among the G7 countries rose from around -0.4% in 2019 to 3.8% in 2020. In the UK, the MPC judge that the output gap has widened and will continue to widen in the near term, peaking at 3% and lowering inflation by around ½% in 2021."
  • "if the level of output in the UK economy were to return to pre-Covid levels in 2023, rather than 2022 in the MPC’s central case, this would lower inflation by around 60 basis points at the two-year horizon, leaving it comfortably below its 2% target."
  • "measures of labour market slack in the economy are also highly uncertain. The same is true, for many of the same reasons, of measures of spare capacity within firms."
  • "One possible explanation of this resilience in underlying costs and prices is that demand and supply have fallen largely in lockstep, leaving slack in the economy relatively little changed."
  • "Despite the much larger hit to activity, the peak output gap following the Covid crisis, at 3% of GDP, is materially smaller than following the global financial crisis. The output gap is also judged likely to be significantly less persistent, lasting only around 18 months."
  • "A decade ago, movements in broad money broadly tracked movements in money GDP – the velocity of circulation of broad money was roughly stable. If the same is true now, we would expect the recent rapid rise in broad money growth to translate, in time, into higher money spending growth. In fact, the projections recently published by the MPC for UK nominal GDP growth over the next year are already in double-digits. Another way of interpreting these rises in the money supply is as the financial counterpart of the excess, or involuntary, savings accumulated by households and companies during the Covid crisis."
  • "Excess savings currently total around £150 billion for households and over £100 billion for companies, with the lion’s share of these savings are in highly liquid bank deposits."
  • "As the population ages and workers retire, labour supply growth will weaken and the bargaining power of workers will strengthen. This would cause both an inward shift, and steepening of, the Phillips curve, raising the price level and increasing its responsiveness to upward demand pressures."
  • "The MPC’s projections assume around a 6½% hit to the capital stock from Covid, and a long-term scar on the UK economy’s supply-side of around 1.75%. This will also serve to tighten supply-side constraints as demand increases."
  • "The appropriate degree of fiscal support to close the output gap has recently been a source of debate in the United States. There, the fiscal response is prospectively larger than in the UK, and the output gap smaller, meaning the upside risks to demand and inflationary are likely to be larger."
  • "Financial crises are costlier and longer-lived because of their balance sheet impact. Holes in balance sheets need to be filled, often through deleveraging, leaving lasting financial and psychological scars. By contrast, the Covid crisis has resulted in stronger, not weaker, balance sheets, at least for the average household and company. This is likely to increase, not reduce, their willingness to take risk."
  • "People’s appetite to spend and socialise has been artificially suppressed. This increases the chances of an overshoot as restrictions are removed, as after previous episodes of suppressed animal spirits. Riskswitching is, for me, more likely than risk-scarring."
  • "My judgement is that we might see a sharper and more sustained rise in UK inflation than expected, potentially overshooting its target for a more sustained period, as resurgent demand bumps up against constrained supply. Financial markets globally have begun pricing this possibility recently, with measures of inflation expectations rising in the US and, to lesser extent, euro-area."
  • "for me, there is a tangible risk inflation proves more difficult to tame, requiring monetary policymakers to act more assertively than is currently priced into financial markets. People are right to caution about the risks of central banks acting too conservatively by tightening policy prematurely. But, for me, the greater risk at present is of central bank complacency allowing the inflationary (big) cat out of the bag."

February 26, 2021

Ramsden - The UK’s progress on resolvability

  • "we committed to Parliament that major UK banks should be resolvable by 2022[1]. That goal is central to the PRA’s general objective to promote the safety and soundness of the firms we supervise, as well as to the Bank’s financial stability objective of ensuring that the UK financial system can serve UK households and businesses in bad times as well as good."
  • "There was very little ex-ante transparency about the path the authorities would follow in a resolution. That led to a hidden subsidy in market pricing of the shares for our largest banks, driven by the market’s belief that the largest banks were ‘too big to fail’, and would be rescued by governments, as proved to be the case in the UK."
  • "in December 2019 the Financial Policy Committee (FPC), of which I am a member, reaffirmed its 2015 judgement that effective resolution arrangements reduce the appropriate level of Tier 1 capital requirements by about 5 percentage points for the UK banking system."
  • "MREL represents a requirement for banks to maintain resources which can be ‘bailed in’ or otherwise be exposed to loss if they fail. The ability to bail in these additional resources for these firms means we can be confident that they will be able to continue providing critical services in the event of a resolution, while maintaining appropriate prudential resources and with any costs borne by bank owners and investors rather than by depositors or taxpayers."
  • "we issued a Discussion Paper in December 2020 to gather feedback and ideas from stakeholders to inform our views. In particular, the Discussion Paper focuses on the thresholds for resolution strategies, the calibration of the requirements, the eligibility of instruments and the application of MREL within banking groups. The window for responses to that paper is open until 18th March this year, and we would welcome thoughts from any of you on any of these issues. We plan to publish a Consultation Paper in summer this year, informed by those responses and setting out any proposed changes to the MREL framework, ahead of publishing our revised policy by the end of 2021."
  • "Each of the major UK banks will assess their preparations for resolution, submit a report of their assessment and publish a summary of their report every two years. The Bank will also make its own public statement on the resolvability of these banks."
  • "Having a competitive market means lowering the barriers to entry and exit; the orderly failure of a firm with minimal financial stability implications is a natural part of an efficient economy."
  • "There is no one size fits all approach for banks to demonstrate their resolvability; banks themselves are best placed to understand what they need to implement in order to ensure an orderly resolution process"