LONDON (MNI), Nov 26 – The testimony of the Bank of England
Monetary Policy Committee members at the Treasury Select Committee
Thursday threw up a headline-grabbing spat over fiscal policy, but
little, if any, sign of members changing their well known views on
monetary policy.

The members of the majority camp on the MPC, who have supported a
prolonged policy pause, offered no evidence to suggest they would vote
for change any time soon. This leaves the two flanking members, Andrew
Sentance who backs tightening and Adam Posen, who has voted for more
quantative easing, still isolated.

Sentance restated the case for tightening while Posen, who has
voted for more quantitative easing, said he believed it would be a less
potent policy tool now than when it was first introduced.

While Posen questioned the potency of QE, in his written evidence
he said “My forecast for inflation to fall well below target through the
medium-term remains unchanged from that which underlay my last two
votes.”

In other words, whatever his doubts about the efficacy of QE,
Posen’s own inflation forecast will make him vote for further policy
stimulus.

Market participants placed weight on comments made by BOE Governor
Mervyn King, who set out conditions under which he would back more QE.
King’s remarks, however, reprised those he made in a speech back in
October and the conditions he laid down are unlikely to be met soon.

King was asked what would happen if net trade failed to pick-up
enough to offset slowing domestic demand. He said the first thing that
would happen, on the fiscal side, is the UK’s automatic stabilisers
would kick in.

“The second is monetary policy, where we could engage in further
asset purchases were we to think that necessary to keep inflation on
track to meet the target.”

The theme that net exports need to pick-up to offset falling
domestic was set out by King in his October 19 speech, and he said then
that further monetary stimulus may be required.

“Domestic spending has already fallen before a pickup in net
exports. This highlights a key role for monetary policy: smoothing the
adjustment process by providing temporary stimulus to demand while the
rebalancing takes place, so reducing the risk of inflation falling below
the target in the medium term,” according to the speech’s text.

As analysts have pointed out, it could be a long time before it is
clear whether net exports are rising fast enough to offset declining
domestic demand to meet the inflation target.

With a value added tax hike set to kick in in January, domestic
spending is likely to bolstered in Q4 as consumers seek to pre-empt the
VAT hike. The Confederation of British Industry data released Thursday
showed retail spending held up in November, but retailers were less
optimistic about the outlook and the CBI warned of problems ahead.

The MPC may have to wait for Q1 data to get a decent view on how
substantial the fall in domestic demand due to the fiscal squeeze and
stresses on household finances is likely to be. Trade data is also more
backdated than most other economic data, erratic and prone to revision.

There appears little likelihood of a majority forming on the MPC
for tightening or easing before it is clearer how the recovery is likely
to pan out next year.

BOE Deputy Governor Paul Tucker, who is part of the MPC majority,
said in his written report to the TSC that he had “half expected” to be
looking at tightening policy by now – something he has said on previous
occasions.

He acknowledged at the TSC, however, that one of the headwinds to
recovery, weakness in both credit supply and demand, is real.

“When the bankers say demand for credit is low there is
unquestionably something in that because the economy is still fairly
weak,” he said.

Also in Tucker’s view “survey evidence points to somewhat more
moderate growth in the near term” and the “recent softening in the near
term outlook has warranted maintaining an unchanged (policy) stance.”

The bulk of Tucker’s written comments were bang in line with the
majority views expressed in the minutes of recent MPC meeting. He
reprised the view that the downside risks from trade and household
balance sheet strengthening and the upside risks from inflation
expectations.

The public dissent at the TSC hearings by Posen over the
endorsement, back in the BOE’s May Inflation Report of accelerated
fiscal tightening, made the news headlines. It highlighted the problems
of drawing up report which is meant to reflect the “best collective”
judgement of the committee.

BOE Chief Economist Spencer Dale, the only other MPC member
before the TSC Thursday, was drawn into a detailed explanation of the
process of drawing up Inflation Reports but was left ungrilled on
his policy views.

–London newsroom: 4420 78627492; email: ukeditorial@marketnews.com

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