–BOE Broadbent: Global Environment ‘Clearly Disinflationary’
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–BOE Broadbent: Inflation Expectations ‘Pretty Well Anchored’
–BOE Broadbent: Denies MPC Took Part In Currency Wars

LONDON (MNI) – Bank of England Monetary Policy Committee member Ben
Broadbent said the most important thing for policy today is that the
international environment is “clearly disinflationary”.

Broadbent, the newest recruit to the MPC, believes the effects of
the sovereign debt crisis and other international woes are set to
dominate any further inflationary effects from sterling’s fall. While
overseas developments are key to the UK inflation outlook, Broadbent
said it was wrong to argue domestic monetary policy had no role to play.

Broadbent rejected the charge the MPC had engaged in “currency
wars” by deliberately devaluing sterling. He said the currency’s fall
was not primarily due to monetary policy but due to the rebalancing of
the supply side of the economy – that the cause of the pound’s decline
were primarily real, not monetary.

The MPC member did not make any explicit mention of the hot topic
in domestic monetary policy at present, quantitative easing. His
comments, however, show that he believes concerns over inflation
expectations and the risk of inflationary effects from a further
sterling fall are overblown, and it implies these are not reasons to
oppose further easing.

In his speech, Broadbent focused on sterling’s depreciation and the
reasons behind it.

Despite the rise in inflation to levels more than double the MPC’s
2.0% target, pay growth has remained subdued and inflation expectations
have stayed fairly well anchored, according to Broadbent.

“I see little evidence that … high spot inflation has materially
dented confidence in the inflation target over the medium term,”
Broadbent said.

“The credibility of the UK’s inflation-targeting regime looks
reasonably robust,” he added.

While credibility cannot be taken for granted “it is striking how
stable both pay growth and medium-term inflation expectations have been
in the face of these relatively large swings in spot inflation.”

While the pass through from sterling depreciation and other
factors, including commodity price hikes, has driven up UK inflation,
Broadbent says the key factor at present is global disinflation.

“Most important for policy today, the international environment is
clearly disinflationary,” Broadbent said.

“Slow growth in the United States, the sovereign debt crisis in the
Eurozone and its knock-on effects on the cost of finance for UK and
European banks – all threaten a further tightening in retail credit and
a further slowing in domestic activity,” he added.

These effects “look set to dominate any remaining pass-through from
sterling’s depreciation to domestic inflation,” he added.

While Eurozone policies, above all, are key to dealing with the
international problems “that doesn’t mean … that UK monetary policy is
powerless or that it doesn’t have its own role to play.”

In his analysis on sterling, Broadbent’s central thesis was that it
was wrong to believe monetary policy was the root cause of sterling’s
decline. The currency, on the measure the BOE uses, its trade weighted
index, fell 22% between 2007 and 2009, the largest two year decline
since 1947.

Since then, while spot rates have gyrated trade weighted sterling
has drifted sideways, rather than rallying, but Broadbent says this is
due largely to factors outside the MPC’s control.

“The main cause of sterling’s decline isn’t monetary but real.
Specifically, it reflects the need to rebalance UK supply – away from
non-traded goods and services and towards the production of tradables –
in order to match an equivalent shift in the composition of demand,” he

–London newsroom 4420 7862 7491; e-mail: drobinson@marketnews.com

[TOPICS: M$B$$$,MT$$$$,M$$BE$]