Above: File image of Huw Pill. Image © Global Utmaning, Lasse Skog. Modified from original, reproduced under CC licensing, non-commercial.
The Bank of England's incoming chief economist may be a shoo-in for the role given a decade of research in previous incarnations suggesting that Huw Pill and colleagues will start off from the same page at least as far as the BoE’s new approach to the oft-controversial policy of quantitative easing goes.
Pill joins the Bank of England on September 06 from Harvard Business School and will be one of nine members of the Monetary Policy Committee who collectively determine the BoE’s monetary policy decisions for September 23 and all other meetings thereafter.
Previously the incoming chief economist was a partner, managing director and chief Europe economist at Goldman Sachs, while before joining the Wall Street firm he served as the deputy director general of research at the European Central Bank (ECB).
“With the likes of the Fed and the ECB having adopted a more dovish monetary policy frameworks in recent months, an important question for the BoE watchers would be whether Chief Economist Pill would want to steer the debate at the MPC in that direction as well. To the extent that this is confirmed, this could play out as a GBP negative in the FX markets,” says Valentin Marinov, head of FX strategy at Credit Agricole CIB.
Nothing has been said by Pill about any of his views on current monetary policy or the underlying economics and little is known about them, although some things could potentially be inferred from prior research activities and the conclusions drawn in the relevant papers.
A common theme running throughout almost all of Pill’s publicly available research is an interest in “non-standard monetary policies” encompassing the quantitative easing programmes that are heavily relied upon as tools by almost all of the world’s major central banks today as well as other, often crisis inspired policy tools like the “enhanced credit support” measures implemented by the ECB at the height of the 2008 global financial crisis.
“Non-standard measures can support financial stability in the short run, but should those measures not produce the desired macroeconomic revival of growth and inflation expectations to re-steepen the yield curve, financial stability may be at risk at longer horizons,” Pill found in a 2016 research collaboration with Lucrezia Reichlin, one of his most recent works.
The incoming chief economist’s findings in relation to quantitative easing and other non-standard policies have been consistent as far back as can be observed including in his earliest investigation of the subject while deputy director general of research at the ECB between 2009 and 2011, a period that saw Europe blighted by both a global financial crisis as well as the Eurozone debt crisis.
While there Pill co-authored at least three papers focused mainly on the ECB and Eurozone’s earliest experiences of these policies, and reached an early but partial determination of the above conclusion in a 2011 paper titled “Non-standard monetary policy measures and monetary developments.”
“We interpret our results as offering evidence in support of the view that the introduction of non-standard measures has supported the availability of monetary liquidity to the non-bank private sector and flow of bank loans to households and, especially, corporations – resulting in an outcome that largely mimics what would have been anticipated in the face of the observed sharp fall in economic activity were the financial sector to be functioning normally,” Pill and others found. “Yet the measures appear less successful in supporting the dynamics of broad money, which is usually seen as having a relationship with macroeconomic stability over longer horizons.”
Pill’s various findings on non-standard policies - which are those that do not rely on a direct influence over and changes of traditional benchmark interest rates like the BoE’s Bank Rate - at least appear to proffer the conclusion that quantitative easing and other policies that expand central bank balance sheets can produce substantial short-term benefits but that their ability to help support economies and achieve policy goals is diminished over the longer-term as well as in more ordinary and stable market conditions.
This is why Pill may be a shoo-in for the role of chief economist at the Bank of England, because the above is very similar to the BoE’s recently updated view of and approach toward quantitative easing, which is set to change over the coming years following an announcement made on pages 12-15 of the August 2021 Monetary Policy Report.
“Standing back from the Covid crisis, and looking at the UK case, there indeed is some evidence that the impact of QE over the past decade has been largest at times of market dysfunction and illiquidity. Of course the available event studies are very few in number. But, if this result proves robust, it suggests that “going big and fast” with QE is particularly effective in these conditions,” Governor Andrew Bailey told an audience at the August 2020 Jackson Hole Symposium organised by the Federal Reserve Bank of Kansas.
Above: Timeline of Bank of England’s quantitative easing and other non-standard monetary policies as shown in Bank of England Staff Working Paper No. 899.
“We need to work through what lessons this may have for the appropriate future path of central bank balance sheets, including the pace and timing of any future unwind of asset purchases. But one conclusion is that it could be preferable, and consistent with setting monetary conditions consistent with the inflation target, to seek to ensure there is sufficient headroom for more potent expansion in central bank balance sheets when needed in the future – to “go big” and “go fast” decisively,” Bailey concluded.
Following a year of careful review, the BoE announced in last month’s Monetary Policy Report that it will be chartering a new approach toward quantitative easing so far unexplored by any central bank, and one that will eventually see the BoE reducing its £875BN stock of UK government bonds through a mixture of non-reinvestment as well as active sales of government bonds back to the market.
This would be for the purpose of reloading its quantitative easing cannon ahead of the next crisis and because the main tool for monetary policy - Bank Rate - has been so greatly reduced since the financial crisis that it’s now limited in its ability to provide substantial and ongoing support to the economy during times of extreme stress.
Such a policy change could potentially create scope for UK government bond yields to rise by more than they otherwise might have over the coming years, and this is something that many see as supportive of the Pound.
"There is a thought of monetary policy that unconstrained and seemingly endless QE support becomes a facet of rather than a remedy for an ailing economy and the incoming member falls into this camp," says Charles Porter, CEO at SGM Foreign Exchange. "Markets expect (and as they priced into the modest rally in GBP during yesterday’s session) that his appointment will see the voices for a normalisation in policy grow in volume and number. This promise of higher yield and reward behind Sterling should support the currency."