LONDON (MNI) – Bank of England Deputy Governor Paul Tucker warned
Monday that the bank’s ability to provide and sustain stimulus depended
on the credibility of its commitment to the 2 pct inflation target.
“Our ability to provide and sustain that stimulus depends
absolutely on the credibility of our commitment to the 2% inflation
target. If our credibility were to slip and medium-term inflation
expectations were to rise, we would have to run with a tighter monetary
stance than otherwise in order to put the genie back into the bottle”.
Tucker said that he had been worried by ‘chatter’ in the markets in
late 2010/early 2011, which he had feared ‘marked incipient signs of
fragility’ in the BOE’s credibility.
He had expected to vote for a rate hike in February but the weaker
turn in the data flow stopped him.
“The weak output data for Q4 2010 published shortly before that
meeting changed my mind, and the Committee’s course, as they revealed
that the economy was softer than I had thought”.
Tucker said he had still been ready to back a hike in subsequent
months but activity never attained ‘escape velocity’.
“By that, I meant that the economy would need to be growing, and be
set to continue to grow, at a rate that would gradually absorb the slack
in the economy.”
“‘Escape velocity’ has not yet been achieved,” he added.
The latter was due to the squeeze on real incomes due to the rise
in commodity prices – “and, more recently, weakening global demand due
largely to the euro area crisis”.
But Tucker warned “Even if, as we all hope, a credible solution to
the euro area’s problems can be put in place in the coming weeks, the
traumas of the past few months will take a while to overcome”.
–London Bureau; tel: 00442078627492; email: dthomas@marketnews.com
[TOPICS: M$$BE$,MT$$$$]
