LONDON (MNI), Sep 30 – Bank of England Chief Economist Spencer Dale
said last week there was an ‘absolutely vigorous’ Monetary Policy
Committee debate going on, and MPC members have proved it in recent
days, airing their divergent views in public.
The committee’s sole hawk, Andrew Sentance, has continued to
deliver his message of the need for a gradual and phased return to
policy normality, starting with a 25 basis point hike in Bank Rate. His
crusade, however, had already started to look a lonely one even before
the minutes for the Sep 8-9 MPC meeting narrowed the odds on the
committee moving in totally the opposite direction and launching QE2.
Those minutes showed more than one MPC member believed there was a
higher chance that further quantitative easing would be needed with the
economic outlook deteriorating.
For these members – “the probability that further action would
become necessary to stimulate the economy and keep inflation on track to
hit the target in the medium term had increased.”
In the days after the minutes MPC Member Adam Posen revealed his
hand, issuing the most unambiguous and strident call for further asset
purchases made by an MPC member to date.
“The case I wish to make is that monetary policy should continue to
be aggressive about promoting recovery, and, subject to further debate,
I think further easing should be undertaken,” Posen said.
Posen went further than that even, saying that while “monetary ease
has an ongoing role to play” it might not prove enough on its own and
the government may also have to get involved in providing stimulus.
Posen sought to qualify those comments in a regional paper
interviews published Thursday, stressing his vote for more QE was not a
foregone conclusion but rather ‘subject to further debate.
In an interview with York’s ‘The Press’, Posen said his intention
had been to provoke feedback from the public and from his MPC colleagues
on the notion of QE2 and said he was not strapping himself to the QE2
wheel. His colleagues still had a chance to talk him out of his
opinions.
That said – it was an unreservedly impassioned call for further QE
which drew deeply on his own studies of Japan in the 1990s and the US in
the 1930s.
The tenor of comments from more mainstream MPC members suggest that
they are more empathetic with the concerns expressed by Posen than those
being vented by Sentance. The latter has been isolated in voting for a
hike at the last three meetings.
Far from offering Sentance any support at the last meeting, the
centre of gravity shifted in the other direction.
BOE Deputy Governor Charles Bean preferred to stress the danger of
weakening consumption and called on savers to cut into their capital if
need be in comments to Channel 4 TV.
“In the short term we want to see households not saving more, but
spending more,” Bean said.
Spencer Dale gave a balanced assessment of the risks to the
inflation outlook in a recent speech although he did not give much
succour to Sentance’s rate hike hopes.
He argued that the above target inflation outturns can be fully
explained as the result of one-off factors, which will fade. This view
is key to the MPC’s central forecast that inflation will head back below
target without policy tightening.
“The increase in prices associated with the combination of the rise
in oil prices, the changes to VAT, and the past depreciation of sterling
is more than sufficient to explain the strength of inflation relative to
target,” Dale said.
Dale attacked the “dangerous talk” that the MPC is turning a blind
eye to inflation, but argued against starting to withdraw the stimulus
now.
“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.
Dale emphasised that the big issue facing the MPC was not the risk
of a double dip recession but the fact that output is 10% below its
pre-recession trend.
Like Posen, Dale said that the UK needed a period of “sustained,
robust growth to get us back to more normal levels.”
“That is what we need to see in order to hit the inflation target,”
he added.
Dale’s voting history suggests that he will not be in the QE2
advance party, having previously issued a warning about the uncertain
effects of untested monetary policies.
His approach appears to be to tackle the credibility issue posed by
high headline inflation, explaining why it has happened and stressing
the MPC’s cast iron commitment to stable inflation, thus leaving the
MPC’s hands free to launch QE2 – should it prove needed.
The October meeting of the MPC is highly unlikely to see anything
other than a vote for unchanged policy – with the majority sitting tight
at least until the forecast round for the November Inflation Report. A
three way split is highly plausible, with Posen and possibly another
such as David Miles, backing QE and Sentance inevitably voting for a
hike.
The November Inflation Report, particularly if the data are soft
between now and then, could well be key for further QE.
The August Inflation Report showed inflation on the modal (most
likely) forecast clearly undershooting target two years’ ahead even
though the MPC plugged in above consensus growth forecasts.
RBS, and former BOE, economist Richard Barwell points out the mean
forecast in that report showed inflation coming in close to target, with
an exceptionally large upside skew. This mean forecast helped justify
unchanged policy.
If the BOE cuts its growth forecast, and its implied forecast for
2011 is almost a full percentage point above consensus and the IMF’s
latest projection, or reduces the skew, then its mean forecast is also
likely to end up markedly below target.
At that stage the MPC would be in the position of having a forecast
which would be fully compatible with further easing and the doves
seeking more QE would have all the momentum.
–London Newsroom: Tel:+44207 862 7491; email:ukeditorial@marketnews.com
[TOPICS: M$$BE$]
