–BOE Dale: Policy Will Need to React if Inflation Risks Materialize
–BOE Dale: Significant Risks on Both Sides Inflation Outlook
–BOE Dale: Current Inflation Risks Unusually Large
–BOE Dale: Small Tightening Would Leave Policy Very Stimulative
–BOE Dale: Risk Credibility, Confidence in, MPC May waver
–Dale: May Need Aggressive Tightening if BOE Loses Credibility
LONDON (MNI) – Both upside and downside inflation risks are
unusually large at present, and the Bank of England’s Monetary Policy
Committee is ready to move policy in either direction if they
materialize, BOE Chief Economist Spencer Dale said Wednesday.
Dale warned there was a risk, with inflation running persistently
above target, that the MPC could lose credibility, adding policy would
have to respond aggressively if this happened. He stressed that the MPC
had not gone soft of inflation, but said it must factor in the downside
risks, as well as the upside ones, in setting policy.
One MPC member, Andrew Sentance, has repeatedly made the case for
monetary tightening faced with persistent, high inflation. Dale,
however, said things were not that simple.
The BOE’s chief economist said there has been “dangerous talk” that
the MPC is turning a blind eye to inflation.
“What better way to counter the dangerous talk than by putting
our money where our mouth is and beginning to withdraw the policy
stimulus? But it is not as straightforward as that – there are
significant risks to both sides of the inflation outlook,” Dale said.
In his speech at Cardiff Business School, Dale acknowledged the
MPC’s credibility is at risk with inflation averaging close to 3% over
the past four years when the committee has a 2% target.
“The period of above target inflation; the fact that inflation has
been higher than expected; and that it is likely to remain above target
until the end of next year all contribute to the risk that credibility
and confidence in the MPC may start to waver,” Dale said.
If the MPC was losing credibility “monetary policy would need to
tighten, possibly aggressively so,” he said.
Dale added, however, that at present loss of credibility was simply
one of a number of risks, rather than a reality.
The “evidence to date is that inflation expectations remain
relatively well anchored,” he said.
While households short-term inflation expectations have risen, so
have the BOE’s own near term projections and measures of “medium-term
inflation expectations have remained broadly stable, as have
expectations of professional forecasters.”
Dale looked in some depth at the reasons why inflation has moved
above target and stayed there. He said there was nothing mysterious
about the rise in inflation.
“The economy has been hit by a series of large price level shocks –
to oil and other commodity prices, to VAT and to the sterling exchange
rate – which have raised companies’ costs and put upward pressure on
prices. Together these factors can more than account for the strength of
inflation,” Dale said.
The near 25% fall in sterling, trade weighted, since mid-2007 may
at peak have added as much as 3 percentage points to inflation but Dale
said its peak impact had now probably passed.
Alongside the price shocks, he found evidence of firms widening
margins to strengthen cashflow in response to the economic downturn.
While there is evidence of firms reducing capacity, Dale expressed
confidence there was still substantial spare capacity out there which
will bear down on inflation.
“There remains some slack in the economy and this is likely to be
pushing down on costs and prices,” he said.
The downward impact of this slack on inflation “should become more
apparent as the temporary effects associated with the shocks to input
prices and VAT wane,” Dale said.
He noted core inflation in the US and the euro area, which have not
seen such large currency depreciations or VAT moves, has fallen
Dale also noted that there are downside risks to growth, in
particular from the planned fiscal tightening, and these add to
downside inflation risks.
“The job of monetary policy is to try to balance these upside and
downside risks to inflation. In essence this is no different to normal,
monetary policy is always faced with a balancing act. But what is
different is that the current risks to inflation are unusually large,”
“My central view is that these risks should gradually lessen as the
temporary effects pushing up on inflation wane and the economic recovery
continues. But it is possible that some of the risks will crystallize
and policy will need to react,” he added.
He said it was likely that in hindsight people will say current MPC
policy was too loose or too tight “but we cannot set policy with
hindsight. All we can do is set policy in such a way that balances the
opposing risks to inflation and be ready to change policy decisively in
either direction as this balance of risks alters,” Dale said.
Dale said he did not know when, or in what direction, policy would
change next, but concluded the decision would be based purely on
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