City shifts focus to financial policy committee
FROM now on there is likely to be less emphasis on the deliberations of the monthly monetary policy committee (MPC) and more focus on the new financial policy committee (FPC), which is expected to begin flexing its muscles next month.
The MPC has long been the main focus of the City’s attention, with its meetings scrutinised for clues about the direction of interest rates. But the bank’s new policy of forward guidance means monetary policy is not expected to change in the next two years at least.
However, the FPC has a much broader remit centred around preventing a repeat of the financial crisis and retains the capacity to influence real rates of lending to specific sectors of the economy.
The committee, which had been holding its quarterly meetings for some time before it assumed official powers, is considering its response to the next big threat to the UK economy and financial system: the withdrawal of quantitative easing in the United States.
It is also taking an interest in house prices that may put it on a collision course with Chancellor George Osborne.
Sebastian Burnside, senior economist at Royal Bank of Scotland, said the most important policy changes are now likely to come from the FPC.
“If you are looking for clues as to what’s going to happen, they are much more likely to come from the FPC than the MPC,” he said. “Its remit is a very broad one. It has the ability to make recommendations to anyone, on anything.”
The FPC’s official role is to conduct “macroprudential regulation” – in effect to monitor, analyse and respond to risks in the financial system as a whole. Specifically, it can manipulate capital buffers to tackle asset bubbles or at least ensure Britain’s banks are protected if a bubble bursts.
Burnside said: “If you are looking for a high loan to value mortgage or a business loan for a development, the determining factor will be financial policy and we think this is going to become more and more relevant to people.”
Gerard Lane, investment strategist at Shore Capital, also believes the FPC’s influence is underrated. He said: “I think Andy Haldane [the Bank of England’s executive director for financial stability] is the most important ignored man in Great Britain.”
The committee has already shown its effectiveness with its swift reaction to problems at the Co-op Bank, which bodes well for its ability to prevent a new financial crisis, he said.
He added that capital buffers should be more effective than “the blunt instrument” of interest rates, because they can target the exposure of lenders to a specific sector at a particular point in the cycle. Lane is therefore looking for clues about which sectors the FPC is likely to intervene in.
With mortgage lending enjoying a resurgence and house prices on the rise, the housing sector is likely to come under scrutiny. But any move to cool mortgage lending by insisting on higher capital buffers would pitch the FPC against the Treasury, which is trying to make it easier for buyers to get a mortgage.
Lane said: “It will be interesting to see what the FPC says about mortgage lending. We have the government gunning the housing market almost as if they have an election to win, and on the other hand an expansive lending of the banks almost completely driven by real estate.”
However, he does not expect the FPC to intervene until further into the housing cycle.
And economists have not entirely abandoned interest in the MPC. Michael Saunders, at Citigroup, says he is still focused on monetary policy.
He says the MPC still has work to do reinforcing its forward guidance. “It’s not that they will say anything different,” he said. “They will say it again, stronger, and keep repeating it until people fully understand it.”