–Corrects Opening Line of 1830 GMT Story To Read “Inflate Away Debt”

LONDON (MNI) – Fears that central banks will seek to inflate away
debt are unfounded and the future is set to be one in which policymakers
are committed to price stability and where bouts of deflation will
occur, Bank of England Monetary Policy Committee member Adam Posen says.

In a speech at the Royal Institute for International Affairs here,
Posen takes a look at the longer time-horizon, rather than focussing on
current monetary policy. He says economic recovery is already underway
in the US and major emerging markets and he foresees a multipolar world
materializing with the emerging economies moving towards current account
balance.

The speech reprises themes Posen has raised in the past. These are
that the global economic imbalances, driven by the gulf between debtor
and creditor nations, will tend to resolve themselves rather than
intensify and that when inflation does become detached from target, it
could well be to the downside rather than the upside.

“Price stability will prevail, with sharper fluctuations around
low average inflation driven by real (relative price) shocks, and
deflation will occur from time to time,” Posen says.

On the current conjuncture, Posen says “While overt financial panic
has ended, and economic recovery is underway in the US and the major
emerging markets, there remain significant risks for the West and its
economic and thus foreign policy leadership.”

With leading economies battling with high debt and low growth rates
“the ability of their governments to finance responses to future crises,
both military and economic, will be meaningfully curtailed for several
years to come,” he says.

While he expects increased political risks, he does not see greater
monetary uncertainty with the risk of central banks ending their
commitment to price stability.

“I know there are some people out there concerned that we are
facing a coming period of inflation, with central banks untethered, if
not actively inflating away government debt. These concerns are
unfounded,” Posen says.

He says that central banks are given a mandate to tackle
inflation because the common will is there to secure price stability,
and this remains the case.

“Deviations from price stability will have to be justified by
reference to large unforeseeable shocks, and will come and go –
inflationary wage-price spirals will be rare, and therefore so will be
sustained inflation. In fact, deflation will occur more frequently than
in the recent past,” he adds.

–London newsroom: 4420 7 862 7491; email: drobinson@marketnews.com

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