BoE chief economist Huw Pill
A reorientation of monetary policy towards serving financial stability ends would distract the Bank of England (BoE) from its “central task” of maintaining price stability, the central bank’s chief economist says.
Speaking to the Scottish Council for Development and Industry in Glasgow today (12 October), Huw Pill said the BoE's monetary policy committee (MPC) remained committed to a medium-term view that stabilises inflation around the 2% target - adding that he expected a "significant monetary policy action" at the MPC's next scheduled meeting on 3 November.
He added that the BoE's set of "temporary and targeted financial stability operations" to support the gilt market came in order to permit an orderly deleveraging of positions held by liability driven investment (LDI) funds and prevent the emergence of a "self-sustaining vicious spiral of collateral calls, forced sales and disappearing liquidity" from emerging in a core segment of the financial markets.
But he said that, while such actions preserve the effective transmission of monetary policy, they were crucially not monetary policy actions in themselves - reiterating the view of the temporary nature of the BoE's intervention in the gilt market.
Pill said: "Were monetary policy to be re-oriented towards serving financial stability ends, not only would it be less effective in addressing dysfunction than more temporary and targeted interventions in specific dis-orderly market segments, but it would also be distracted from its central task of maintaining price stability and returning inflation to the 2% target."
Pill added: "At the time of writing, this distinction between monetary policy actions and actions taken by the Bank to support financial stability has been recognised and priced by market participants."
Pill's speech came as long-dated gilt yields continued to rise - with the yield on 30-year gilts moving up from 4.790% at the close of yesterday to about 4.85% by 9am. Yields on 30-year paper breached the 5% barrier just after 11am and have fluctuated around this point since, standing at 5.062% at 2:05pm.
Yields on 30-year gilts closed last week at 4.389% and were as low as 3.1% at the start of September.
