–Miles: BOE Feb Inflation Report Largely Reflects His Own Views
–Miles: Argues Against Faster Policy Tightening Than IR Implies
–Miles: Sharp Tightening In Monetary Policy Now Undesirable
–Miles: UK Does Have An Inflation Problem; Finds It Worrying

LONDON (MNI) – Bank of England Monetary Policy Committee Member
David Miles has made the case against a sharp tightening in monetary
policy, saying the BOE’s February Inflation Report projections are
compatible with only ‘very gradual’ removal of monetary stimulus.

The MPC member said key assumptions in the Inflation Report (IR)
were ‘largely’ in line with his own views, with inflation set to fall
back rapidly to its 2.0% target during 2012. He argued it would be a
mistake to tighten policy at a more rapid pace than that factored into
the IR’s central projections.

The IR forecasts are “all conditional on Bank Rate following a
path implied by market rates which would mean a very gradual removal of
the current very accommodative stance of monetary policy,” Miles said.

The key IR forecasts were conditioned on Bank Rate rising from its
current record low 0.5% to 0.7% in the second quarter of this year and
on up to 1.0% by end 2011 and 2.1% by end 2012. This implies a
tightening pace of roughly 25 basis points a quarter.

Miles believes the MPC should continue to set policy in line with
its latest, best collective forecasts of where inflation is heading.

“If one knew that the outcomes would evolve in line with those (IR)
central profiles for activity and inflation I don’t see a strong case
now for significantly accelerating the process of tightening relative to
that,” he said.

“Of course no-one should feel greatly confident that inflation will
follow the central path and gradually move back to target over the
course of next year. But I do not believe the profiles are obviously
biased or excessively optimistic,” he said.

Wrong To Tighten More Than Forecasts Imply

The BOE MPC has come in for some stinging criticism from analysts
over its persistent under estimation of inflation outturns. Miles,
however, argued it would be wrong to let this distort current policy.

“I think one thing should certainly be avoided. This is to try to
deflect legitimate questions about past (ex-post) forecast errors by
showing how tough on inflation one is with a tightening in policy on a
scale which the assessed profiles for inflation and growth do not
warrant,” Miles said.

Miles said policy could be set so that inflation, currently around
twice as high as target, would return to target more rapidly than shown
in the IR.

“But I am very sceptical about whether it is desirable,” Miles
said, citing three reason against it.

The MPC member said more aggressive tightening would drive up
sterling, which “might add to volatility of output in the short term and
be unhelpful for re-balancing.”

Secondly, it would generate more slack in the economy which would
probably damage the productive potential of the economy going forward.

Thirdly, he warned aggressive tightening now might well have to be
reversed.

“A sharp tightening in monetary policy now needed to bring
inflation to target in the very near term would quite likely mean easing
policy again aggressively next year creating volatility,” he said.

Miles highlighted the difficulties faced by the UK at present, with
high headline inflation and no rapid rebound from recession.

“We do have an inflation problem. Inflation on the CPI measure over
the year to February is at 4% – double the 2% target. As an MPC member I
find it deeply worrying that this should be so,” he said.

The typical rapid growth rebound usually seen after recessions is
not materialising, he lamented.

“What is unusual about the recent very sharp recession is both
its depth and the probable absence of a subsequent period of
consistently above trend growth,” he said.

These problems, however, do not imply the MPC should move away from
tightening policy at any pace other than that implied by its forecasts
and, at the February MPC meeting, Miles was one of the six of the nine
members to vote for unchanged policy.

–London Bureau; Tel: +44207862 7492; email: drobinson@marketnews.com

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