In an interview with the Sunday Telegraph today BOE MPC member David Miles says that some people were arguing that the plunge in inflation showed the need for a looser monetary policy.
This seemed wildly implausible just six months ago and I have my doubts even now
But it does mean that there is no great urgency in starting the process of moving monetary policy back towards a more normal setting.
Miles said it was possible that he would not vote for a rate rise before his term at the BOE ends in August and he pointed to expectations in financial markets that the first rate hike would only come later next year.
The falling UK inflation
Falling prices can pose a threat to economies if consumers put off purchases in the belief that prices will be lower in the future. This forces businesses to cut prices to entice people to spend. Workers also feel the pain through wage cuts or redundancies, pushing up debt burdens in real terms.
Mr Miles said this risk was currently minimal:
The falls in energy and food prices are more likely to have increased the ability of households and firms to manage their existing debt than to have made it more difficult
Part of the reason for the recent plunge in world oil prices, which has pushed down inflation, was weaker demand in emerging economies, especially China he said.
It is relevant here, and in fact helpful, that the UK exports relatively little to China –- we get the benefit of the boost to real incomes from lower commodity prices that weaker Chinese growth brings but we don’t pay much of a price in terms of weaker exports
The situation was the reverse of a few years ago, when booming demand in China pushed up commodity prices and saddled Britain with high inflation, cutting into living standards.
The current reverse situation is partly why I see fewer reasons for worrying about deflation risks than if the undershoot of the 2 percent inflation target reflected purely domestic factors
One BOE MPC member certainly in no hurry to press the start button on interest rate normalization.
Read his full piece here
Miles: In no rush to hike interest rates
