LONDON (MNI) – The Bank of England Monetary Policy Committee still
faces significant downside and upside risks to inflation in setting
monetary policy, according to Committee Member David Miles.

In a speech in Dublin today, Miles stresses that there is a danger
that the committee may not do enough to bear down on inflation but at
the same time he also concedes that there is a risk of tightening policy
too soon.

“The subsequent rise in VAT at the start of this year has helped
push inflation back above the target by about the same amount. At the
start of next year there will be another VAT rate increase – and that is
likely to keep inflation above the target a bit longer. I am not blase
about that. That is why I said that I thought we face a risk in the UK
of not doing enough to bear down on inflation”.

If the current recovery was a ‘normal’ one, Miles states, he would
be prepared to take the relatively small risk implied by tightening
monetary policy prematurely. But the present recovery shows no signs of
a strong cyclical upswing, Miles laments.

“I do not see many of the signs that are usual in a normal upswing.
Typical features of the early stage of strong cyclical upswing would be
rapid growth in lending and in the money supply, signs of emerging
shortages in capacity across several sectors, wage pressures moving up,
and indicators of household and business confidence moving steadily
higher. Neither the aggregate statistics on the state of the economy,
nor surveys, nor the discussions that I have had with businesses across
the UK, are consistent with this”.

Other MPC officials, including BOE Chief Economist Spencer Dale and
MPC Member Adam Posen, have stressed that the UK economy needs a strong
recovery to eat into the 10% output gap left by the recession. Posen has
openly advocated the case for a further tranche of quantitative easing.
Other MPC members have expressed themselves more ambivalently, while
Andrew Sentance continues to push for a small rate hike.

Miles also notes that wages are failing to show any sign of a
pickup in domestically generated inflation pressures. From the mid
1990s to the start of the financial crisis, wage settlements had been
stable around 3.5% – a level consistent with inflation outcomes around
target.

“Whole-economy annual wage settlements have now fallen to around
1.5% – well below both the current rate of inflation and below the
inflation rate thought likely over the next year,” Miles added.

Summing up, Miles says:

“…These are not normal times, which is why there is a risk that
monetary policy is normalized too quickly. There is also a risk that
monetary policy is left too loose too long. If only one of those risks
existed we should certainly have set monetary policy too tight or too
loose”.

Miles also notes that inflation outcomes have become much more
variable since the onset of the financial/economic crisis and says he
believes that the risks inflation will be significantly above or below
the target 2 years from now are higher than before the crisis.

“Since the financial crisis actual inflation has also become much
more variable. Between 1997 and 2007 the annual rate of inflation was
within 0.5% of the target for 66 months out of 132 – 50% of the time.
Since the start of 2008 inflation has been within that range for only
30% of the time. Most of the time it has been above 2.5%; but it has not
been all one way traffic – for some of last year inflation was below
1.5%”.

Up until quite recently Miles had the reputation of being one of
the more dovish members of the BOE MPC, but today’s comments suggest he
edging towards a more ambivalent stance

–London newsroom 0044 20 7862 7499; email: ukeditorial@marketnews.com

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