London (MNI) – The following is the full text of Bank of England
Monetary Policy Committee member David Miles’ annual report to
the Treasury Select Committee Wednesday.
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Report to the Treasury Select Committee

Professor David Miles

External Member, Monetary Policy Committee

July 2010

Voting Record

In the last year I have voted to expand the size of the Banks
asset purchases, and then to maintain them at 200bn and hold Bank Rate
at 0.5%.

I joined the MPC following exceptional falls in output and
substantial increases in unemployment. Although output stabilised in the
second half of 2009 the level of GDP in the first quarter of 2010
remained more than 5% below its pre-recession peak. CPI inflation fell
to 1.8% in June 2009 remaining below target until December and then
rising to above 3%. But I believe underlying domestically generated
inflationary pressures are not strong. Although there may have been some
reduction in the supply potential of the UK economy the scale of the
decline in the level of GDP suggests that spare capacity remains
substantial.

Following the financial crisis the balance sheet of the UK banking
system has been impaired. We are still on an adjustment path towards a
sustainable pattern for the price and availability of credit. Asset
purchases, and maintaining a low level of Bank Rate, are a means to
stimulate spending, smooth the adjustment taking place within the
financial sector and limit the impact of that adjustment on the broader
UK economy. I believe that the Banks asset purchases have contributed
to the recovery of many asset prices, particularly of corporate bonds
and equities, and have helped boost issuance of such assets by
non-financial companies.

I voted to expand the size of the asset purchase programme to
stg 200bn at the MPCs August 2009 meeting and to stg 215bn in November.
I believed that increasing the size of asset purchases to 215bn would
provide greater insurance against the downside risks to growth and
inflation from constrained credit supply. In some respects these risks
have diminished as UK GDP growth has stabilised. This is why I have
subsequently voted to keep the stock of assets purchased at 200bn.
However, recent events in sovereign debt markets and in bank funding
highlight the downside risks. Further asset purchases may be warranted
at some point in the future.

CPI inflation has increased to above the 2% target. In large part,
the increase in CPI inflation has been driven by rising commodity prices
(particularly energy costs), import price increases in the wake of the
large sterling depreciation in 2007 and 2008, and by changes in VAT. The
recent increase in inflation does not reflect rising inflationary
pressure stemming from demand outstripping supply in the economy. I
believe that the underlying domestic inflationary pressures once we
strip out what are likely to be temporary effects (eg from VAT changes)
have not been strong. Wage pressures have been subdued, with
settlements generally below 2%, despite a rise in households near-term
inflation expectations.

The Outlook

The economic outlook remains unusually uncertain. Hence, in setting
monetary policy it is important to consider both upside and downside
risks.

The banking sector remains fragile. Recently, concerns in sovereign
debt markets focusing on the sustainability of fiscal policies in some
European countries have led to tightening bank funding conditions.
Conditions in the euro area are particularly important for the UK given
its importance as an export market. In the UK net lending to individuals
and non-financial companies has remained weak so a renewed tightening in
credit conditions could have a significant impact on demand. If so,
demand may pick up very slowly so that the degree of spare capacity in
the economy continues to push down on prices in the medium term and CPI
inflation falls back below the target.

This does not mean that I am comfortable with the current high rate
of inflation. We continue to face the problem of balancing risks: risks
that inflation above target lasts long enough to become ingrained in
expectations and affect behaviour so that it is hard to bring down,
versus risks that the recovery in output becomes weaker and then
disappears, leaving inflation pressures lower than is consistent with
the target further ahead.

There is a risk that a protracted period of high CPI inflation
could lead to higher inflation expectations becoming entrenched. So far,
measures of households medium-term inflation expectations have not
increased much and there is little evidence that any rise in inflation
expectations has led to higher wage growth. Without a pick up in wage
inflation I do not think it likely that inflation being significantly
above target is sustainable. Of course wage pressures may build
significantly over the next year, though I do not believe this is the
most likely outcome. Risks of an extended period of low growth which
would further weaken those pressures are also real.

Explaining Monetary Policy

Over the past year I have made several visits to areas outside of
London, including Northern Ireland, Scotland, the Southwest and Wales. I
met a range of companies and talked to business groups to hear their
views on the economy. These meetings were extremely helpful,
particularly in understanding the impact of the credit crunch on smaller
and medium sized companies.

To communicate my views on monetary policy more widely I have given
several interviews (to amongst others the Belfast Telegraph,
Independent, South Wales Evening Post, Sunday Herald, Daily Mail,
Financial Times).

I have also spoken at a number of schools to explain monetary
policy.

My published speech in Bristol on Wednesday 14th July was my fourth
in the last twelve months. I have considered it particularly important
to explain the MPCs asset purchase programme (quantitative easing) to
the public. I discussed the efficacy of the asset purchase programme in
my speech in Belfast, in August last year and at Imperial College London
in February this year. A key consideration in formulating monetary
policy has been the adjustments taking place in the financial sector
which I discussed in my speech at Bloomberg in London in December and
recently in Bristol.

–London newsroom 0044 20 7862 7491; email: drobinson@marketnews.com

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