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August 25, 2013 6:13 pm
Bank of England policy makers have the difficult task of kick-starting a recovery without appearing to have gone soft on inflation.
With this commitment to price stability in mind, Martin Weale was the sole dissenter at this month’s Monetary Policy Committee’s meeting on new governor Mark Carney’s policy of forward guidance on interest rates.
From his office at Threadneedle Street, the external MPC member warns that the way the guidance was presented could cast doubt on the committee’s inflation- fighting credentials.
“The key point is that any policy can have risks as well as benefits,” Mr Weale said. “The risk is that people in practice will interpret it as an increase in the inflation target. And obviously everyone at the BoE is doing their best to minimise that risk.”
A combination of anaemic growth and persistently high inflation has left the MPC exposed to criticism on both sides. Chancellor George Osborne wants more monetary activism, whereas the head of a lobby group for the over-50s accuses them of “taking far more money from people’s pensions than Robert Maxwell ever did”.
When Mr Carney announced the BoE’s intent to keep interest rates on hold at 0.5 per cent until unemployment falls to 7 per cent – which it does not expect to happen until mid 2016 – he reaffirmed the commitment to the 2 per cent inflation target. But, with inflation remaining above that since the end of 2009, many have long questioned this commitment. The BoE’s poor forecasting record and better news on the economy have left markets sceptical about how long rates will remain at rock bottom, with investors pricing in a rise in the second half of 2015.
Though he accepts he is tied into the framework agreed by the rest of the MPC, Mr Weale’s concerns have helped fuel doubts about the guidance.
His gripe is with the first of three “knockouts”, or clauses, which if breached trigger a review of the guidance framework. The first knockout states that if inflation is likely to remain above 2.5 per cent in 18 to 24 months from now, then the MPC will reconsider the framework. Mr Weale is concerned the knockout could be misinterpreted as a weakening of the BoE’s commitment to the lower 2 per cent target, which the BoE always says it will hit two years from now.
“For me the key issue was that it had 24 months, or two years, in the headline. That was where I thought the confusion was likely to arise,” he said. “A shorter horizon would have given the message I wanted to convey: that we were concerned about inflation; it’s our job.”
Mr Weale says his concern over price pressures stems from his experience of ultra-high UK inflation which hit 25 per cent in 1975 during his formative years. “There’s a long way from 3 per cent inflation to the experience of the 1970s and 1980s,” he said, adding: “I certainly think it would’ve been better not to go down that path. The costs of tidying it up were very substantial and we don’t want to start on that again.”
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