BOE Dale: Must Weigh QE Against High Inflation; Supply Hit
–Dale Talks Of “Downward Spiral” From Recent Developments
–Dale: If Economic Situation Deteriorates Further Easing May Be Needed
–Dale: Inflation Set To Climb Higher Coming Months; Supply Growth Weak
LONDON (MNI) – Bank of England Chief Economist Spencer Dale said
the case for further quantitative easing had to be weighed against high
and rising inflation and weakness on the supply side in a speech
Dale voted for a hike in Bank Rate as recently as July and his
comments show him taking a cautious approach to the need to relaunch QE.
His speech focused on the apparent weakness of UK productivity growth,
and the risk that supply capacity is less than previously thought.
The September BOE MPC minutes showed some members highlighted the
risks of relaunching QE when inflation has been running persistently
well above its 2.0%, and Dale’s comments suggest he is one of those who
has concerns over sanctioning a new wave of QE, or QE2, right now.
“If the economic situation continues to deteriorate, some
additional loosening in monetary policy might be needed. But that
decision will need to be weighed against the backdrop of continuing high
inflation, with inflation set to climb higher over the next few months,”
“It will also need to take account of the extent to which the
slowing in output reflects weak growth in supply as well as demand,” he
Dale acknowledged the marked deterioration in economic conditions,
largely as result of developments overseas.
“Growth in the world economy, including in our core trading
partners in Europe and the US, has slowed. Concerns about the fiscal
positions of some countries, particularly within the euro area, have
intensified,” he said.
The belief that policymakers cannot respond decisively to the
challenges they face have fueled the problems, “leading to a pronounced
downward spiral,” Dale said.
The UK has seen its export growth falter, falling asset prices and
increased funding pressure on banks and “confidence, both within
companies and households, has taken another downward step,” he said.
Against this backdrop monetary policy must support demand, and Dale
the MPC has done this through keeping Bank Rate at exceptionally low
levels, with market interest rates declining, creating “a material
easing in monetary conditions.”
The decision to go further, however, and relaunch QE is not a
straightforward one for Dale.
The bulk of his speech looked at the sharp decline in the reported
rate of UK productivity growth from the rates of growth seen before the
Dale cited the apparent paradox of employment growing robustly as
output per worker falls.
“It is difficult to understand why firms should increase employment
so significantly if their existing workforce is not fully utilised,” he
He found evidence that the margin of the spare capacity in the UK
economy may not be that large despite weak output growth.
“It is hard to reconcile the number of new jobs created over the
past year with the belief that firms are sitting on a substantial margin
of spare capacity,” he said.
He offered a number of possible explanations for the declining
productivity puzzle: these included the BOE’s belief that growth has
been stronger than the official estimates; that productivity growth
rates pre-crisis were unsustainably high and that it has been hit by the
effects of the financial crisis.
Dale said research suggested the financial crisis may well have hit
supply capacity and this was something the MPC had to take into effect
in setting policy.
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