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I had the privilege of listening to a webinar on Wednesday afternoon, which was hosted by Karen Ward from J. P. Morgan and also featured Dr. Gertjan Vlieghe.  Karen is JPM’s Chief Market Strategist for EMEA (Europe, Middle East and Africa) and Dr. Gertjan Vlieghe is a voting member of the Bank of England’s MPC (Monetary Policy Committee). 

The interview covered a wide range of important topics and I took notes in order to interpret the speakers’ key points.  Please note: Gertjan did point out that the opinions expressed where his views and not necessarily those of the Bank of England’s MPC.

Karen on the topic of the Pfizer vaccine:

‘A 90% efficacy rate is a ‘Game Changer.’  The timing is excellent (of the vaccine against the current backdrop of a high second wave of the virus).  How quickly will we get to that important point of herd immunity?’

Karen went on to ask Gertjan, ‘If the vaccine is distributed, could we be looking at a very strong bounce back in the second half of 2021?’

Gertjan replied, ‘Only if the vaccine works. In a way, the vaccine is already in the forecast. That is precisely what our central forecast is.’

Karen then asked, ‘What will you be tracking to assess the degree of long-term scarring?’

Gertjan’s response was ‘Unemployment dynamics – it’s difficult to all get back into a job.  There is still some slack in the economy and levels of unemployment will not come back down for a long time.  We will need stimulus.’

In relation to Brexit, Karen asked, ‘How is it going and what are the changes that will affect Q1 2021 and the longer term?’

Gertjan responded, ‘This is a longer-term issue. There is a trade-off between sovereignty and smooth and open trade.  It will have a purely economic consequence. We will have less trade, less competition and less technological diffusion.  This is very important for the country, but not for monetary policy.  It has also dampened investment (in UK businesses).  To what extent are UK firms ready?  How much disruption will there be in the short term?  How will financial markets react?  This will impact on monetary policy; it’s about how smoothly we transition.’

Karen on Central Banks, ‘Have Central Banks been monetarily financing governments?’

Gertjan replied, ‘On ‘Co-ordinated action’, I’m not entirely happy with it.’  Fiscal policy is doing the heavy lifting and monetary policy is helping. 

He continued to remark on QE (Quantitative Easing), ‘We expand reserves beyond what banks really need.  The macro-economic impact is very small and expansion in reserves does not lead to a proportionate response in lending.  In 2008/2009, re QE, we had no high inflation.  If inflation does come back, we know what to do; there is no constraint.’

Karen’s next question was, ‘Could a government less focused on austerity contribute to a higher velocity of money?’

Gertjan responded, ‘Completely, absolutely.  Timing is crucial in relation to the government flipping back into debt reduction mode.’

Karen then asked, ‘What can the Bank of England do to support the economy?’

Gertjan replied, ‘The impact of QE on the economy is state-contingent.  When market functioning is impaired, QE can have a big impact.  Expectations of future real interest rates are really very low.  The stimulus power (of QE) now is very low.  With regards to technical constraints, it’s important to understand that they are self-imposed – we can change the rules.’

Comment

This update is based on my interpretation and notes from the first half of the webinar’s discussion and I have tried to stay faithful to the content.

From my point of view, I was happy with the Dr.’s input as he obviously understood everything in detail and had no problem with any of the questions put to him by Karen.  He also gave me confidence (based on his views), that these people on the Bank of England MPC really do know what they are doing and are a great aid to the recovery of our economy in the UK.

Summary

Over the next few days, I will work on a precis for Part 2 of the webinar for you, which starts with a discussion on negative interest rates.

If you have any topics that you think we should cover on markets, advice or planning issues, please let me know.

Steve Speed

13/11/2020