— External Rate Setters Lament Low Inflation, Raising Questions Over MPC Rift and Future Policy
By Laurie Laird
LONDON (MaceNews) – Top Bank of England rate setters agreed that quantitative easing will exert a diminishing influence on the UK economic recovery, raising questions about the tools available to the central bank as two external officials lamented persistently low inflation in the UK.
Addressing parliament’s Treasury Select Committee, Bank of England Governor Andrew Bailey admitted that asset purchases may have “had more of an effect back in March,” adding that “future interventions will be guided” by the state of the economic recovery. BoE Chief Economist Andy Haldane also spoke to the assembled members of parliament, along with Silvana Tenreyro and Michael Saunders, both external members of the Bank’s rate-setting Monetary Policy Committee.
Despite that, Bailey defended the Bank’s decision to increase the size of its asset-purchase programme by a bigger-than-expected £150 billion earlier this month, bringing the package to £875 billion, calling the decision “a demonstration of our commitment to use policy actively.”
Haldane agreed that “incremental effects of a dollop of QE” are less useful than at the start of the crisis, adding that his decision to support the large increase in asset purchases in November “was finely balanced.” Haldane considered a smaller package, before deciding that “extra insurance was called for.”
Haldane, one of the most optimistic members of the Bank’s Monetary Policy Committee was queried about his description of the UK’s economy as V-shaped, particularly after a slowdown in economic growth in the September. “I never predicted a V-shaped recovery,” he said, noting that the letter V most appropriately described the shape of the UK rebound “at that time.”
However, Haldane was forced to concede that gross domestic product could fall short of the Bank’s forecast by 3%-4%, due to the reintroduction of economic constraints to combat a second wave of Covid transmissions. Back in November, Bank staff predicted a 2% fall in fourth quarter output, suggesting that updated forecasts envision a decline of 5%-6% over the closing months of the year.
Despite recent developments on a Covid vaccine, the “near term” economic outlook “is still looking difficult,” said external MPC member Silvana Tenreyro. “We might see weak spending and weak employment in the coming months.”
Tenreyro along with fellow external member Michael Saunders lamented Britain’s persistently-low inflation rate, which has remained below the Bank’s 2.0% annual target for the past 15 months. “The economy is not on the cusp of higher inflation. It anything, it is the opposite,” said Saunders.
A no-deal Brexit could “easily see a 1% increase in inflation,” said Bailey, but even that would leave inflation below target, with consumer prices rising by an annual rate of just 0.7% in November, noted Tenreyro. Tenreyro has been publicly supportive of pushing UK rates into negative territory, although most MPC members maintain that a move to sub-zero rates is only one of a number of policy tools under consideration.
However, Bailey hinted at a difference of opinion amongst MPC members over the potential of a resurgence in inflation, telling MPs that “you’ve seen the debate between Michael [Saunders], Silvana [Tenreyro] and me on inflation.”
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Contact this reporter: laurie@macenews.com.
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