LONDON (MNI) – Bank of England Chief Economoist Spencer Dale says
that he wouldn’t “in all likelihood” have backed more quantitative
easing at the November meeting of the Monetary Policy Committee even if
the gilt coupon transfer hadn’t happened.
Dale, speaking at an MNI event, said that many concerns over the
coupon move had been “misplaced” and insisted that the BOE had not lost
its monetary independence. The stg35 billion transfer of QE coupon cash
would be taken into account in future decisions by the MPC.
“In subsequent meetings, I’ll take the Government’s actions into
account, both in terms of any decision to increase further the size of
the asset purchase programme and, potentially, in terms of the timing at
which we begin to tighten monetary policy,” Dale said.
Dale said that the move was “akin” to a QE boost of about the same
size, noting that some commentators had suggested this should have
caused the MPC to tighten policy by a similar amount in order to
keep the policy stance neutral.
But this implied a degree of “fine-tuning” of policy which is
impossible, Dale said. Any reversal of QE would also have caused
“disproportionate effects”, he added.
“…It implies a degree of precision in policymaking far greater
than is actually the case…we should be realistic about our ability to
fine tune policy – and, indeed, about the desirability of trying to fine
tune policy …”.
Still, large transfers of money between the fiscal and monetary
authorities raised “understandable concerns”, Dale said.
“In subsequent meetings, I’ll take the Government’s actions into
account, both in terms of any decision to increase further the size of
the asset purchase programme and, potentially, in terms of the timing at
which we begin to tighten monetary policy”.
The main theme of Dale’s speech was the strange “stickiness of
inflation” in the UK despite weak growth and a large degree of slack in
the labour market. He cited relatively elevated unit wage costs as a key
factor behind inflation’s resilience, as wages have not come down far
enough given the fall in output.
Much of the adjustment to the real economy had occurred via a
“remarkable” fall in real wages rather than by rising unemployment, an
“encouraging” indication of the flexibility in the UK labour market but
at least some had come via inflation, Dale said.
With “perfect foresight” this elevated inflation could have been
tackled by a opting for tighter monetary policy but this would have come
at a very high price, Dale cautioned, in terms of a deeper recession and
higher unemployment.
“Looking ahead, it seems likely that that this adjustment process
is not yet complete and so the stickiness in inflation may persist for a
while yet”.
Real wages were likely to get squeezed further yet, Dale
added, company profit margins had been squeezed and sooner or later
firms would move to restore these.
“Although real wages have fallen sharply, it seems likely there is
still a little further to go in adjusting to the shocks that we have
seen so far. As we saw earlier, real wages have not yet quite fully
adjusted to the past weakness in productivity growth and to the shifts
in relative prices,” he said.
“The counterpart to that incomplete adjustment is that companies’
margins have been squeezed. The private sector profit share is a little
below its historical average. That squeeze is unlikely to continue
indefinitely.”
-London newsroom: 4420 7862 7492; email: dthomas@marketnews.com
[TOPICS: M$B$$$,M$$BE$]
