LONDON (MNI) – The following is the full text of Bank of England
Monetary Policy Committee member Ben Broadbent’s written annual report
to the Treasury Select Committee for 2012.

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Report to the Treasury Select Committee

Ben Broadbent, External Member, Monetary Policy Committee

26 June 2012

Voting record

A few months before I joined the Committee, during the early part
of 2011, it looked as though the world economy – and, with it, that of
the UK – was embarked on a steady (if unspectacular) recovery. Business
surveys were consistent with growth at around its trend rate and, with
inflation still a long way above the target, any additional monetary
stimulus seemed unwarranted. In my view this remained the case through
the early part of the summer as signs of weaker growth were, at least in
part, attributable to higher energy prices, which was were also pushing
up on near-term inflation.

Since then, events have taken a material turn for the worse,
particularly in other parts of Europe. In early August, concerns about
indebtedness and competitiveness in some parts of the euro area led to a
sharp weakening in the price of risky assets, including sovereign debt
in the periphery countries and, on a wider basis, the debt and equity
of European banks. This threatened a renewed round of credit withdrawal
across the continent, including in the UK. It also meant that the rise
in oil and other commodity prices came to a halt.

Along with the rest of the Committee, I therefore voted for an
expansion of asset purchases in October and again, following weaker
forecasts in both the November and February Inflation Reports, in
February 2012. Along with other policy actions, most notably the two
large auctions of ECB liquidity (the LTROs) announced in December,
this helped buoy sentiment going into the New Year and business surveys
picked up too. In the UK, near-term indicators of output growth improved
and firms continued to take on new employees.

However, it was not clear, even then, that there was sufficient
growth in the economy to begin to absorb spare capacity in the UK. And
the broader rally in sentiment, both in financial markets and among
businesses, in any case proved short-lived. European equity indices
peaked in March and the euro areas composite PMI has declined in each
of the past five months. This may reflect the limitations of central
bank policy in the single currency area. The provision of funds by the
central bank is clearly crucial, in times of stress, if the underlying
strains in the Euro area are not to be multiplied by a full-blown
banking crisis, and the LTROs succeeded in that respect. But this
lending does not, in and of itself, solve the underlying problems of
indebtedness and competitiveness.

More recently, our own task on the MPC has been complicated by an
upward revision to the near-term forecast for inflation (between the
February and May Inflation Reports) and I have therefore refrained from
voting for a further easing in policy since February. That said, I have
been reassured that measures of medium-term inflation expectations in
financial markets have, of late, fallen back slightly. It is also
notable that the price of crude oil has fallen back materially since its
peak in early March.

The outlook

The economy remains in a difficult position. Weak activity over the
past year owes something both to the earlier rise in commodity prices,
and the resulting squeeze on real domestic income, and also to continued
fiscal tightening. These particular pressures are likely to ease in
coming months. In the absence of any renewed upward pressure on
commodity prices the squeeze on real household incomes will subside,
mostly via lower inflation (rather than faster nominal wage growth). As
for the fiscal position, the OBR projects a decline of 0.4% of GDP in
the governments cyclically adjusted primary balance during the current
fiscal year, compared with well over 3% of GDP during the past two
years.

In my view, however, a good part of the drag on UK activity relates
to the problems of the euro area, and it is much less clear that these
are abating. Investors remain nervous about the underlying strains and
imbalances within the system and about the authorities capacity to
address them. In the meantime, the risk of a much more extreme outcome
is pushing up yields on risky assets throughout the continent. Note
that, although this is transmitted (and probably amplified) partly by
the banking system, a cost that is then borne by borrowers dependent on
bank lending, the past two years have seen a rise in financing costs
even for those borrowers (such as large companies) that can, in
principle, by-pass the banks.

This tightening in financial conditions has affected demand in the
economy and the near-term indicators suggest that, abstracting from the
various short-term distortions (the effect of the Golden Jubilee
holiday, for example), output is broadly flat in the next quarter or
two, as it has been for the past eighteen months. By impairing its
ability to reallocate resources to areas where economic returns are
higher, higher financing premia may also have affected the economys
supply capacity. Whatever the reason, it is evident that productivity
growth has been much slower than in previous economic recoveries and it
is not clear to me, at any rate, that this is purely the result of weak
demand.

After all, it is not simply that firms have been failing to shed
labour: in aggregate, at least, they have been actively hiring new
people. This suggests that the weakness of productivity growth reflects
something other than the combination of deficient demand and labour
hoarding.

All that said, there still looks to be quite a bit of spare
capacity, most obviously in the labour market. It therefore seems likely
that, controlling for the short-term influence of commodity prices,
inflation will continue to drift down, over the medium term, back to the
2% target.

Explaining monetary policy

In my first year on the Committee I have given three public
speeches. The first, last September, discussed the relationship between
rebalancing, the exchange rate and inflation. The second, in March,
argued that levels of debt in the domestic non-financial economy were
not as problematic as many suppose. More recently, in May, I explained
how the risk of rare but very bad economic outcomes can impair growth in
investment and productivity quite independently of the banking system.

I have given nine on-the-record media interviews, three during
Agency visits, seven to national outlets (including the FT and BBC Radio
4 and the Independent newspaper). I have also had several off-the-record
meetings with journalists.

I have made four Agency visits, one to the North West (along with
the rest of the MPC), last October, the others to the West Midlands
(November 2011), Northern Ireland (February 2012) and Wales (June 2012).
During these I have made numerous visits to individual companies, as
nesses. well as attending larger meetings with groups of local
busineses.

-London newsroom: 4420 7862 7491; email:
drobinson@marketnews.com/wwilkes@marketnews.com

[TOPICS: M$$BE$]