The monthly tea party for academic economists at the Bank of England – the regular meeting which Gordon Brown claimed meant he had “made the Bank of England independent” – looks more and more irrelevant. The other changes Mr Brown made to the Bank, taking crucial powers away, have exposed the Bank to torrid times trying to run the markets.
This week some mortgage rates have gone up, because market interest rates have gone up. The MPC has not met. It has not wanted rates to go up. It has expressed no view on the way money market rates these days may be up to 1% or 100 basis points higher than the rate they recommend.
It should be the Bank of England’s job not merely to host a meeting to settle what rates should be, but to spend the rest of the month making sure that decision is reflected in market rates. If they do not do so, the system breaks down and the MPC looks unimportant.
When market rates first started deviating from MPC rates last year we were in the high noon of the moral hazard period, when the Bank seemed to think it was fine that rates were higher than MPC rates. This week it looks as if the Bank of England does wish to bring rates more into line with MPC recommendations, but is finding it difficult to do so.
A central Bank can control market rates through its open market operations as a main player in money markets. The Bank has not been willing to commit sufficient funds to markets to get market rates down to its proposed rates. One of the reasons may be that the Bank has too much committed to Northern Rock and is short of fire power itself to deal with the shortages in the markets. It reinforces the case for securing earlier repayment of the money advanced to that institution, so the Bank of England has a freer hand to sort out money market rates.The MPC itself could meet and lower its recommended rate to offer a signal that it does not want market rates to rise.