–Adds Comments On Downside Risks To Inflation

DUBLIN (MNI) – Bank of England Monetary Policy Committee Member
David Miles has told an audience here that quantitative easing remains
a ‘powerful tool’ at the Bank’s disposal and ‘one which we may come to
use’.

But he also stressed that making additional asset purchases was not
an ‘obvious’ choice at present.

“I think we’re in a good situation, where even though interest
rates have been effectively cut to zero, our options are not simply how
much do you tighten, I mean, you do have a tool, quantitative easing,
which I think Adam Posen coherently explained remains a powerful tool
and one which we may come to use. I think it’s very helpful that that is
the case,” he said.

Miles said he has yet to make up his mind on whether more QE would
be needed, adding that there is a risk monetary policy could be left too
loose, too long and that any decision on additional asset purchases
would depend on future economic data.

“It’s not obvious what the next direction for monetary policy is.
We face the difficulty of trading off these two big risks and as we get
more information about how things are playing out and where the risks
are moving. I think those are the things that will determine what we
do,” he said.

While Miles said he thought there was a ‘substantial risk’ that
inflation could remain significantly above target, he hinted that he was
more concerned about downside risks to CPI and that he feared tightening
monetary policy could leave the UK with below-target inflation in the
medium-term.

“Maybe even a larger risk is that if we normalise monetary policy
too quickly and knock on the head a recovery that only is only just
embryonic and actually it turns out that inflation pressures, 12-18
months down the road, when the change in VAT has worn off and the
effects of the past depreciation of sterling have fed themselves
through, the risk is we have inflation pressures that sit well-below
target, and that we would have tightened monetary policy too quickly,”
he said.

Miles’ arguments seem to counter those made by MPC Member Andrew
Sentance for an immediate if small hike in rates but do not offer
outright support to those made by Adam Posen for an imminent increase in
QE.

–London Bureau; tel: +44207 862 7492; email: wwilkes@marketnews.com

[TOPICS: M$B$$$,M$$BE$,MSSFX$]