Contents of Quarterly Bulletin 2014 Q2
Each article is available as a separate pdf file; click on the appropriate title to access the relevant file. Alternatively you may download the complete issue.
Complete issue (2.9MB)
The UK productivity puzzle (242KB)
By Alina Barnett, Sandra Batten, Adrian Chiu, Jeremy Franklin and María Sebastiá-Barriel of the Bank’s Monetary Analysis Directorate.
Labour productivity growth in the United Kingdom has been particularly weak since the start of the crisis. The recent strength in hiring and modest pickup in productivity growth suggest that spare capacity within firms is unlikely to explain much of the current weakness. Factors related to the nature of the financial crisis are likely to be having a persistent impact on the level of productivity — but there remains considerable uncertainty around any interpretation of the puzzle.
The Bank of England as a bank (584KB)
By Stuart Manning of the Bank’s Customer Banking Division.
Much is published about the Bank of England’s policy functions and its financial operations. But less is typically known about the Bank’s role as a bank in the more traditional sense, offering accounts and banking services to its customers. The three main customer groups to which the Bank provides banking services are: the UK Government; overseas central banks; and certain other financial institutions, such as central counterparties. The Bank’s approach is not to compete with commercial banks, but to provide banking services where doing so supports its mission and in particular its objective to maintain financial stability.
By Nick Butt and Alice Pugh of the Bank’s Monetary Assessment and Strategy Division.
Changes in credit conditions have been one of the main headwinds affecting the UK recovery since the financial crisis. The likely path of credit spreads is a key determinant of the Monetary Policy Committee’s projections for output and inflation. This article explains how staff at the Bank of England calculate measures of credit spreads which can be used to help inform the Monetary Policy Committee’s central macroeconomic projections.
A short video discusses some of the key topics from this article.
By Gareth Anderson and Becky Maule of the Bank’s Monetary Assessment and Strategy Division.
Well-anchored inflation expectations play an important role in the achievement of the Monetary Policy Committee’s (MPC’s) 2% inflation target. At the moment, available measures are consistent with inflation expectations remaining well anchored to the MPC’s target. Empirical work suggests that unexplained ‘shocks’ to households’ expectations may have had a significant impact on inflation over the past.
By Lewis Kirkham of the Bank’s Monetary Assessment and Strategy Division.
Satisfaction with the way the Bank sets interest rates in order to control inflation has picked up in the past year to the highest level since 2007, according to the latest Bank/GfK NOP surveys. This is likely to reflect falls in households’ perceptions of inflation, as well as the general improvement in the economic outlook. Households expect increases in Bank Rate to be gradual, which seems consistent with recent guidance from the Monetary Policy Committee. Over the past year public awareness of the monetary policy framework has remained unchanged and public support for the inflation target has remained strong.
By Shiv Chowla, Lucia Quaglietti and Łukasz Rachel of the Bank’s International Economic Analysis Division.
The UK economy is closely integrated into the wider global economy. These ties mean that global developments affect the economic fortunes of the United Kingdom. This article presents model-based estimates which suggest that world shocks have driven around two thirds of the weakness in UK output since 2007. Trade linkages are an important channel for the transmission of world shocks to the UK economy. But financial linkages and spillovers through uncertainty are significant, too — and together are likely to account for the majority of the impact of world shocks on the United Kingdom since 2007.
A short video discusses some of the key topics from this article.
By Nick Davey and Daniel Gray of the Bank’s Market Services Division.
Banks require intraday liquidity to settle payments in CHAPS, the United Kingdom’s high-value sterling payment system. In April 2013, the Bank of England introduced a Liquidity Saving Mechanism (LSM) into the infrastructure used to settle CHAPS payments. The LSM has reduced CHAPS banks’ intraday liquidity requirements by around 20% (or £4 billion). The LSM has reduced incentives for banks to adopt adverse behaviours to economise on their intraday liquidity requirements, thus enhancing the resilience and efficiency of CHAPS.
By Alice Alphandary of the Bank’s Risk Management Division.
The Bank stands ready to lend to its counterparties against eligible collateral, which includes a wide range of securities and portfolios of loans that can be adequately risk-managed through a combination of prudent eligibility criteria, valuations and haircuts. When accepting portfolios of loans as collateral, the Bank undertakes an extensive due diligence process to understand and mitigate the legal and financial risks associated with these loans and the level of uncertainty surrounding these risks. Residential mortgages now represent the majority of collateral pre-positioned and the Bank’s Risk Management Division uses loan-level data as an input to its credit stress and cash-flow models to calculate the stressed value of these loans in extreme, but plausible, scenarios.
Recent economic and financial developments
UK and US short-term interest rates rose a little during the review period. Euro-area short-term interest rates declined in response to growing expectations among market participants that the European Central Bank (ECB) would loosen monetary policy at its June meeting (after the end of the review period). In the event, the ECB announced a number of easing measures. The volatility of financial markets implied by derivatives prices remained low. Some contacts suggested that this reflected reduced uncertainty around the path of monetary policy and output growth. UK and US ten-year government bond yields were largely unchanged over the review period, as rises in short-term interest rates were broadly offset by lower forward rates. The majority of advanced-economy risky asset prices increased over the review period and were broadly unaffected by tensions between Ukraine and Russia or other global events.
This is the first in a new series of annual reports, designed to throw light on the operation of the Bank’s published framework for implementing monetary policy and providing liquidity to the banking system, known as the Sterling Monetary Framework (SMF). As recommended by Bill Winters’ review of the SMF, the Report draws on the views of a wide range of internal and external stakeholders to identify areas where the SMF works well, and areas where it might be improved. The Bank’s Court has reviewed this Report and has endorsed its publication.
This article reviews the work undertaken by the London Foreign Exchange Joint Standing Committee during 2013.