Monetary Policy From End To End: Define, Decide, Deliver
Speech given by
Dave Ramsden, Deputy Governor for Markets and Banking
The Strand Group Lecture Series
King's College London
20 November 2017
I'd like to thank Grellan McGrath for his assistance in preparing
this speech, and colleagues around
the Bank for their useful comments
End to End Monetary Policy
This is my first speech in my new role as Deputy Governor for Markets and Banking, and as a member of the
It is a pleasure to be giving it in the newest part of King's College London
Monetary Policy Committee (MPC).
And I'm delighted it's the 25th
and in my position as a visiting professor here at King's. Strand Group event,
showing how this flagship series of policy relevant events has already become well established.
One of the key differences between my old and my new role is the level of accountability. As Chief Economic
Advisor to HM Treasury for the past 10 years, as would be expected under the civil service code, I was
generally responsible for giving evidence-based advice to ministers who were ultimately accountable for their
decisions to parliament and the public. That is very different in my new role in which I am directly
accountable to parliament and public for decisions taken as a member of the MPC, Financial Policy
Committee (FPC) and Prudential Regulation Committee (PRC). I also have a direct set of prescribed
responsibilities under the Bank's application to itself of the Senior Managers Regime - a framework
developed to improve accountability at the top of financial services firms.
As a key part of that accountability, over the coming years I look forward to giving many talks and speeches
such as this one to set out the thinking behind decisions and their delivery across the full range of my and
the Bank's
responsibilities. The Bank has quite rightly placed emphasis on the role of communication as a
policy tool in its Vision 2020 strategy; describing our work to as diverse a range of people as possible.
Of course I start this new role at an interesting point in time. It is nearly 17 months since the UK voted to
leave the EU, and just over 16 months until that decision takes effect in March 2019. In the period since the
referendum we have learned that while Brexit was at one level a binary decision, there are many potential
outcomes, and paths to those outcomes. Perhaps reflecting this multidimensionality, uncertainty about Brexit
seems to be increasing rather than diminishing over time (Slide 1). In the Bank's Decision Maker Panel
Survey (which is run jointly with Nottingham University), the share of firms who placed Brexit among the top
sources of uncertainty rose from 35% in a survey taken in September 2016 to 40% in August this year. While
those who say it is not an important source of uncertainty fell from 23% to 13% over the same period.
Brexit has an important bearing on the Bank's pursuit of monetary and financial stability, and it is taking steps
to help ensure the necessary adjustment is as smooth as it can be. The Prudential Regulation Authority is
engaging proactively and intensively with banks and insurers to ensure their plans are robust to the full range
of potential outcomes. The FPC is focussed on its statutory responsibility of identifying and monitoring and
risks. The MPC's focus has been on balancing the
taking action to reduce trade-off, as required by its remit,
between the speed at which inflation returns to target, and the support that monetary policy provides to jobs
and activity during the adjustment process. In the Markets and Banking areas of the Bank, for which I have
direct responsibility, we are undertaking a series of initiatives which, although not directly related to Brexit,
improve effectiveness and enable innovation in key parts of the UK's financial
will help ensure stability,
system through this period of challenges and opportunities.
It is the work of the MPC and of the Markets and Banking areas that I would like to focus on today. In
'end to end' monetary policy, which for the purposes of this lecture I will
particular the role they play in split
into three phases: Define, Decide, and Deliver. Respectively, they refer to the clear specification of the
objectives of monetary stability; the setting of policy appropriately to meet those objectives; and the
implementation of monetary policy through the Bank's operations in financial markets.
Define
The Bank's responsibility for monetary
Let me start with Define. stability dates back to at least the Bank
Charter Act of 1844 when it was given a monopoly on issuing notes in England and Wales. In the intervening
period the Bank's monetary policy objective has taken many different forms that have varied in their degree
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of formality, clarity and success including the gold standard, membership of Bretton Woods, monetary
targets and the Exchange Rate Mechanism.
For much of that period, the Bank's monetary stability aims lacked definition. As the Governor has recently
-
noted1, this changed with the Bank of England Act of 1998 which clarified for the first time in three
- The 'end' for monetary policy was defined as maintaining price
centuries the Bank's responsibilities.
stability (specified in subsequent Remits as the pursuit of a symmetric 2% CPI inflation target) and, subject to
that, supporting the economic policy of the government including its objectives for growth and employment.
The means for getting there is the independent setting of monetary policy by the MPC. This represented a
major step forward for the clarity, accountability and efficiency of monetary policy, as assessed by the 2013
review of the monetary policy framework by the Treasury.
By de-politicising the short run trade-off between inflation and activity, this arrangement has provided the
grounds for the most successful monetary policy regime for the UK thus far. The MPC's
flexible inflation-
targeting framework was further strengthened by the 2013 Treasury Review and the following Remit update
which effectively 'completed the contract' by further specifying the relationship between the MPC's primary
objective for price stability, and its secondary objective to support jobs and growth. Though, having overseen
the 2013 Review, I must declare an interest in judging its contribution.
Since then, the Remit has explicitly acknowledged that, in exceptional circumstances shocks to the economy
may be particularly large or the effects of shocks may persist over an extended period. In such a period the
1
Carney M (2017), remarks given at a conference to mark 20 years of the MPC's operational independence, notes that Governor Eddie
George once remarked that in the half century that followed the Bank's nationalisation in 1946 it "operated under legislation
which,
remarkably did not attempt to define our objectives or functions."
MPC must balance the trade-off between the speed with which inflation is brought back to the target and the
consideration that should be placed on the variability of jobs and economic activity.
Of course we didn't have Brexit in mind when
updating the Remit in 2013, nevertheless the Bank headed
into the EU referendum last year with arguably the most clearly defined objective for monetary policy in its
323 year history. And it has been the foundation of the framework the MPC has used to set monetary policy
since the referendum result. Although I only joined the Committee in September, the analytical approach in
the framework is one that I fully sign up to. So I would like to spend a minute setting it out.
Fundamental to the way in which the MPC has reacted to Brexit is that monetary policy cannot prevent either
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the necessary adjustment such as that implied by the movement of the exchange rate - as the UK moves
towards its new international trading arrangements, or the weaker income growth that is likely to accompany
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it. These are real phenomena likely to play out over many years exactly the kind of thing that monetary
policy cannot affect, no matter how often it is asked by some commentators to do so.
What the MPC can do is support the economy during the adjustment process. But even in doing that the
Committee has faced a trade-off between stabilising inflation on the one hand and output and employment
on the other. I would note this is something the Committee was able to anticipate before the referendum, the
minutes of the MPC's May 2016 meeting that "[t]he implications for the direction of monetary policy
stating
will depend on the relative magnitudes of the demand, supply and exchange rate effects."
And my colleague
Ben Broadbent has recently set out in more detail what this means in the particular context of Brexit.
True to this statement, the MPC has set monetary policy since the referendum on the basis of its
assessment of how those effects are interacting. This is made difficult by the large, uncertain and sometimes
offsetting implications of the decision to leave the EU. So it is not surprising that even though all Committee
members sign up to the framework I have laid out, their individual assessment of the economic outlook has
differed along the way.
Decide
Which brings me to the second phase of 'end to end' In the MPC's meeting at the
monetary policy: Decide.
start of this month, a majority of its members thought that the evolution of supply and demand was such that
the margin of slack in the economy now seemed fairly limited, and that underlying inflationary pressures had
shown some signs of picking up. As a result, they judged that this reduced the degree to which it was
appropriate for the MPC to tolerate an extended period of above-target inflation, and that a small reduction in
stimulus was warranted. Notwithstanding this 25bp increase, Bank Rate remains close to its lowest rate its
323 year history (Slide 2).
I wasn't in that majority. That was not because I disagree with the overall framework for setting monetary
policy in this exceptional period, but rather because I have a somewhat different assessment of the
economy.
By way of framing my own decision, let me give a few comparisons to how things might have turned out in
the absence of Brexit, for which I will use the MPC's May 2016 forecast as a proxy (Slide 3). GDP growth in
the year to 2017 Q2 (the latest quarter for which we have a full set of both expenditure and labour market
data and the latest data available at the time of the November MPC decision) was 0.8pp weaker than the
MPC's May 2016
forecast, within which business investment growth was a full 5.2pp lower. Despite the
weakness in output, employment and hours have actually been stronger than expected, meaning productivity
growth per hour was been 2.2pp weaker in the year to 2017Q2. Nominal wage growth was 1.5pp weaker
than in the pre-Brexit forecast, which, coupled with the effects of the depreciation on inflation, meant real
wage growth was 2.6pp weaker.
So, how does this nexus of data fit into my assessment of the economy? Let me start with demand, which is
arguably the most straightforward to explain. Although the economy confounded the initial expectations
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embodied in usually-reliable surveys taken immediately after the referendum which implied that growth was
headed for negative territory - there is no doubt that demand has now slowed.
This can primarily be accounted for by a sharp slowdown in consumption growth, from 3.1% as recently as
the middle of 2016 to 1.5% in the year to 2017Q2, the weakest four quarter growth since 2012. The primary
driver of this weakness has been the weakness in real income, itself reflecting the 18% depreciation of
sterling from its pre-referendum peak as financial market participants have reacted to the prospect of Brexit.
Working in the opposite direction, we have witnessed a rotation toward other components of demand. While
this is a positive development, it hasn't been enough to offset an overall slowing in GDP growth.

Business investment has picked up a little to grow at 2.5% in the last year, though this is weaker
than the 3.9% growth on average across our G7 counterparts, and the strength of future investment
implied by capital goods orders in the US and euro area (Slide 4). In addition to the Decision Maker
the Bank's own
Panel survey and findings of the Agents, a range of survey results suggest that
Brexit related uncertainty is an important factor weighing on investment in the UK despite otherwise
favourable conditions for capital expenditure (Slide 5).
 sterling's
Relative to other components of demand, exports have benefited from depreciation and
stronger than expected global demand. At the same time and not withstanding their role in
increasingly integrated global value chains, growth in imports has been sluggish, meaning that net
trade has provided support to GDP growth.
Taking all of these together leads me to conclude that, although the resilience of growth in the wake of the
referendum has been welcome, the broad channels through which we would have expected demand to
adjust to a vote to leave the EU are now operating. As a result, GDP growth has slowed from average
quarterly rates of 0.7% in 2014 and 2015 to 0.4% more recently. For those of you who, like me, have had to
assess and categorise past UK slowdowns as either U- or V-shaped, I consider what we are witnessing as
more of a saucer-shaped slowdown and pretty unusual for that (Slide 6). Given the long horizon over which
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the effects of Brexit could play out, we are likely to be on the flat part of the saucer for some time as
embodied in the MPC's forecast for GDP growth which remains at 0.4% per quarter over the
3-year forecast
horizon, conditional on households and companies basing their decisions on the expectation of a smooth
adjustment to new trading arrangements.
If realised, that will leave the economy about 2% smaller by 2020 than the May 2016 MPC forecast would
have implied. And that growth shortfall is in spite of the fact that global growth has strengthened more than
expected in the May 2016 MPC forecast.
The biggest risk I see to that outlook for demand is around the resolution of the current uncertainty about our
eventual trading arrangements and the path that will be followed to reach them. Were that uncertainty to be
lifted, I can see a case for why UK whole economy demand could grow more strongly, more in line with, for
example, recent manufacturing indicators. Equally, were uncertainty to persist at current levels or even
increase further, I could see a case for demand growth, and in particular investment growth, being weaker.
The reaction of the supply side of the economy since the referendum is more open to interpretation and
given the uncertainties is something informed people can have divergent views on. The combination of weak
investment, strong growth in employment, weak wage growth and low productivity growth (Slide 7) lends
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itself to two potential explanations and they are neither mutually exclusive nor exhaustive. In either case
the sign of the response of key variables is the same, making it difficult to pick between them, but the
implications for the outlook for spare capacity and inflation differ.
The first is that since the referendum there has already been a material hit to the supply side of the economy
in the form of a reduction in Total Factor Productivity (TFP), which is the efficiency with which companies put
their labour and capital inputs to use. This would reduce output per worker, and hence real wages. It would
also reduce future profitability, thus deterring investment. A reduction in TFP would have a lasting effect on
productivity and hence the supply side of the economy, reducing the rate at which it can grow without
generating above-target inflation.
Like most economists I expect Brexit to have a negative impact on TFP for a variety of reasons, including the
need to reallocate resources toward supplying new customers or new products, and the general effect of
reduced openness2. But these are effects that, like the effects of capital deepening on productivity, will tend
to either build over the long run or only really take hold after our trading arrangements have changed. So,
to have a material impact on productivity by the end of the MPC's forecast
while they can be expected
horizon, I'm not convinced they can fully account for the additional weakness in productivity we have already
seen. It shrank by 0.2% in the year following the referendum compared to growth of 0.5% on average in the
preceding seven years.
A second potential explanation for how the supply side data have evolved is that since the referendum
workers have responded to uncertainties about the outlook by showing even more flexibility in their wage
demands. People's willingness to accept lower real wages would encourage firms to hoard labour, and shift
away from capital expenditure toward more labour input for a given unit of output. Such a further increase in
labour market flexibility would imply that part of the recent renewed weakness in productivity growth is
cyclical, meaning there is a bit more room for the economy to grow without generating above-target inflation
in the medium term.
I attach some weight to the idea that workers have responded to the changing outlook by showing greater
flexibility in their wage demands. This would be consistent with a trend I have observed throughout my
career and in successive cycles in which peaks and troughs in unemployment have been lower in each cycle
since the 1980s. Since the crisis, real wage flexibility has been particularly notable, and it may have
intensified further since the referendum as the unemployment rate has fallen further to 4.3%. As supporting
real wage growth relative to the MPC's
evidence I would point to the fact that the weakness in private sector
May 2016 forecast has been greater than would be required just to match the weakness in productivity
growth3, and that is in spite of the additional pressure on real income growth from higher import prices over
the same period4. This may also be working alongside the level of uncertainty to encourage firms to meet
output growth using labour rather than undertaking capital expenditure projects.
At the margin, the idea that workers are responding to Brexit by showing increased flexibility could mean that
there is more room than headline measures of slack suggest for the economy to grow without generating
above-target inflation in the medium term (Slide 8). Certainly, it would help explain why, despite
unemployment being at its lowest level in 42 years, measures of domestically generated inflationary pressure
generally remain below levels that would be consistent with inflation being at target in the medium term. That
includes a wide range of measures, including unit wage costs, those derived from the Consumer Price Index,
and those based on national accounts measures of value added.
In turn, the subdued nature of domestically generated inflation is evidence that the current elevated level of
headline inflation is attributable to pressure arising from the pass through of the depreciation of sterling. In
2
See Broadbent (2017) for a full discussion of these issues
3
Private sector real wage growth, calculated by deflating nominal wage growth by output prices, was 1.8pp weaker in the year to
2017Q2 than expected at the time of the May 2016 forecast, while growth in productivity per head was 0.7pp weaker.
4
For a full discussion of wage growth, see Cunliffe (2017)
judging the appropriate balance to be struck when faced with a trade-off between returning inflation
sustainably to target and supporting jobs and activity, one must pay close attention to any sign that above
target inflation is feeding through to 'second round' effects in domestic costs. So far that doesn't seem to be
the case.
In summary, it is difficult to determine precisely why the supply side of the economy has behaved as it has in
the period since the referendum. The weakness in real wage growth, and the subdued nature of domestically
generated inflation mean I am not yet ready to discount the idea that labour market flexibility is continuing to
intensify. If true it would mean there is a little more room than headline measures of slack suggest for the
economy to grow without generating above-target inflation in the medium term. For that reason, in our
November meeting I was willing to wait for more evidence on the evolution of wage and domestic cost
growth before beginning to withdraw some monetary stimulus. So I voted for no change in Bank Rate.
Deliver
of 'end to end' monetary policy: Deliver.
Once the decision is made, attention turns to the final phase A key
for Markets and Banking is responsibility for delivering much of the Bank's
part of being Deputy Governor
monetary, and indeed financial stability, operations. That includes: implementing decisions; monitoring
market developments; identifying and, where appropriate, addressing risks to resilience and effectiveness.
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In many ways the November MPC decision was a historic change in policy the first increase in Bank Rate
in over a decade (Slide 9). I remember the previous increase in Bank Rate well as the July 2007 MPC
meeting was the first I attended as the Treasury's representative. A lot
else has happened in the intervening
10 years, but from an operational perspective it was a relatively straightforward change for the Markets area
of the Bank to implement. Bank Rate, which is the rate paid on reserve accounts held at the Bank by 183
financial institutions, was changed immediately after the MPC's decision and used as the basis for
calculating interest due for that day.
Because reserves held at the central bank are the ultimate liquid and risk-free asset in any currency, the rate
paid on them serves as the reference point for all other overnight interest rates in the money market. As a
market rates increased on the day of the MPC's decision including the
result a range of key overnight
Sterling Overnight Index Average (SONIA, a key benchmark for unsecured overnight borrowing and lending)
and the Repurchase Overnight Index Average (RONIA, a key benchmark for overnight borrowing and
lending secured against gilt collateral). In the period since the change in Bank Rate, both SONIA and RONIA
have been on average 25bps higher than in the month preceding the decision (Slide 10).
But effective delivery extends well beyond mechanically changing parameters within our systems. The
Bank's operations in money, gilt, corporate bond and foreign exchange markets, its operation of the Real
Time Gross Settlement (RTGS) system, all supported by its comprehensive financial and operational risk
management framework, afford it a unique insight into the workings of the financial system. Markets and
Banking staff are thus able to advise members of the MPC, FPC and PRC about key developments in
monetary and financial conditions.
Our operations also leave us well placed to assess the resilience and effectiveness of markets and the
infrastructure that underpin them. The Bank has always stood ready to use its convening powers or, where
necessary, intervene directly in order to help ensure the smooth functioning of core sterling markets. But this
has been given new impetus in recent years as initiatives such as the Open Forum and the Fair and Effective
Markets Review made clear that the Bank considers scanning the horizon for emerging vulnerabilities as
important as stepping in when risks have crystallised.
Working to monitor and improve resilience and effectiveness is something I consider to be a core part of
Bank's work in this area will play an
delivering not only monetary, but also financial stability. And I believe the
important role in ensuring the UK has a resilient, effective and innovative financial system as it leaves the
EU. There are two ongoing initiatives to enhance financial infrastructure that I would like to draw attention to
demonstrate the Bank's
today. Both willingness to define ourselves in terms of best practice of governance
and transparency, and our ongoing commitment to working closely with end users of this infrastructure.
The first is the reform of the SONIA overnight interest rate benchmark. In April next year the Bank will take
on end-to-end administration of this key market benchmark, which is also a critical input to the MPC and
FPC's assessment of conditions in sterling money markets. The key outcome of
the reforms will be to
improve the sustainability and representativeness of this piece of infrastructure by using a broader dataset
bilateral collected as part of the Bank's Sterling Money Market
covering both brokered and transactions, data
collection.
Following the implementation of SONIA reforms the Bank will publish an assessment of its compliance with
IOSCO Principles for Financial Benchmarks, alongside an external assurance report. Consistent with those
principles, a SONIA Oversight Committee comprising of a mix of Bank and independent members will
provide scrutiny on all aspects of the benchmark.
A more robust SONIA provides markets with a credible alternative to sterling Libor as a key reference rate
as the market's preferred alternative rate by the
and benchmark. Indeed SONIA has recently been confirmed
Sterling Risk Free Rate Working Group. That is a necessary step in ending the current over-reliance on
Libor.
Developing alternatives to Libor and similar benchmarks and encouraging their use has been a key priority of
the international financial community since the Financial Stability Board, chaired by the Governor, published
its report on interest rate benchmark reform in 2014. But the importance of this work has grown as it has
become apparent that transactions underlying Libor are at best scarce. Resulting concerns about the
medium-term sustainability of Libor, set out in a speech by Andrew Bailey in the summer, highlight the need
for a transition away from Libor to alternative benchmarks.5
- -
As we move to the next phase of benchmark reform work a broad-based transition to SONIA it is clear
that active engagement will be needed from participants across all relevant sectors and markets. As a result,
the Bank and FCA are currently finalising plans to broaden the mandate and membership of the Sterling Risk
Free Rate Working Group.
The second ongoing initiative I would like to draw attention to is the renewal of RTGS - which is the means
by which central bank reserves are transferred between banks big and small, and settles around £600bn of
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transactions per day. The world of payments is one which has undergone many changes in its long history
from the idea in the 1770s that a single central location (the Five Bells Tavern once of Lombard Street)
should be nominated as a meeting point at which at which to settle obligations to the launch in 1996 of real
time gross settlement in the UK. We are currently living through another period of innovation, as FinTech has
enabled payments to be decoupled from traditional banking services.
The aim of the RTGS renewal programme is to deliver a more resilient, flexible and innovative sterling
settlement system, and by doing so we will help ensure the UK remains a world-leader in payment systems.
As well as providing a strong underpinning for monetary stability, RTGS will promote competition and
strengthen financial stability. The programme will run over a period of years, but some key features have
already been delivered including the opening up of access to RTGS to non-bank payment providers, who
have been able to apply for accounts RTGS since July.
One particularly noteworthy milestone was reached last Monday, when the Bank began to provide the direct
delivery of the High Value Payment System, CHAPS, the workings of which are shown in this Vision 2020
style graphic (Slide 11). This brought to an end the split of responsibilities between CHAPS Co, the private
sector administrator of the scheme, and the Bank, which provides the underlying infrastructure in the form of
the overall RTGS system. Although this split had its merits historically, the changing scale, nature and
sophistication of cyber and other threats to the stability of payment systems mean there is a compelling
financial stability case for being able to provide end-to-end risk management within one organisation.
In recent months the Bank has worked closely with the shareholders, users, management and staff of
CHAPS Co to bring about a smooth and orderly transition and avoid any disruption to the service provided.
On Monday last week, former CHAPS Co staff took their new seats in the Bank of England, and by 7am
on the Bank's infrastructure
more than 22,000 transactions had been completed with a value of £11bn. In the
first week, approximately 862,000 transactions were completed, with a value of £1.5trn, including wholesale
5
Bailey (2017)
interbank payments, mortgages, company invoices and much more. In short, it was business as usual for
banks and their customers.
Like our administration of SONIA the combined RTGS and CHAPS service will benefit from best practice
governance arrangements, including a new Board which will meet for the first time in December, chaired by
me and with four independent members recruited through a competitive process. We will also continue to
benefit from the voice of CHAPS users, through the establishment of a new Strategic Advisory Forum for
senior industry representatives.
Conclusion
Let me recap on how I see end to end monetary policy. The well-defined objectives of monetary policy have
provided a strong foundation on which the MPC can base its decisions over the course of the crucial period
up to and beyond the UK's withdrawal from the EU.
But to be successful, monetary, and indeed financial stability, policy must be effectively delivered. That
requires the efficient implementation of decisions. And it requires stable and effective core sterling markets
and payments infrastructure.
The Bank has a long history of outstanding execution of decisions, of scanning the horizon for emerging
vulnerabilities in markets, and of using its position to address them. In keeping with this history, these are
things I will prioritise in my term as Deputy Governor for Markets and Banking.
Beyond Define, Decide, Deliver, there is of course 'Describe'. Improving our communications internally and
externally is a key priority of the Bank's Vision 2020 strategy, because better communication will support our
mission to deliver monetary and financial stability. A new focus of our communications is on schools. We
started last week in Merseyside and over the next year Bank staff are visiting 200 schools covering 9% of the
pupil population. But engaging with traditional stakeholders remains important, on which note let me take
some of your questions.
11
All speeches are available online at www.bankofengland.co.uk/speeches
References
(2017) 'The future of LIBOR,' Speech given at Bloomberg, available at:
Bailey, A,
https://www.fca.org.uk/news/speeches/the-future-of-libor
(2017) 'Brexit and interest rates,' Speech given at the London School of Economics, available
Broadbent, B.
at: http://www.bankofengland.co.uk/publications/Documents/speeches/2017/speech1009.pdf
(2017) Opening remarks to the Bank of England 'Independence - years on' Conference,
Carney, M. 20
available at: http://www.bankofengland.co.uk/publications/Pages/speeches/2017/999.aspx
'The Phillips curve: lower, flatter or in hiding?,' Speech given at the Oxford Economics
Cunliffe, J. (2017)
Society, available at:
http://www.bankofengland.co.uk/publications/Documents/speeches/2017/speech1008.pdf
12
All speeches are available online at www.bankofengland.co.uk/speeches