A top Bank of England policymaker has doused hopes that the incoming Governor Mark Carney will be able to give the economy a boost following his arrival in July.
Martin Weale, a member of the rate-setting Monetary Policy Committee, warned that more stimulus risked a damaging surge in inflation because price rises have already been higher than the Bank's 2pc target for most of the past four years. The persistent overshoot, he said, “is a constraint on my freedom of action”.
“Failure to damp sufficiently any new shock pushing up on inflation would result in inflation expectations becoming more entrenched. That, in my view, limits the scope we have to support demand at the current juncture,” he told the British-American Business Council Transatlantic Conference in Birmingham.
George Osborne appointed Mr Carney on a ticket of “monetary activism” to help boost growth. The Chancellor has also asked the MPC to investigate how it might use “forward guidance” as an additional tool. But Mr Weale, who has been sceptical about the policy, suggested there is little it can achieve.
He indicated that the committee’s current stance has effectively provided “guidance” by accepting the market’s forecast for interest rates to remain at 0.5pc until late 2016. “The point is not that it is the market’s view, but rather that the MPC has concluded that this implied path for the Bank Rate is consistent with its remit, at least in current circumstances,” he said.
Simon Hayes, UK economist at Barclays, added: “Mr Weale seems to be unconvinced of the value of going further than this when communicating the policy outlook.”
Mr Hayes said Mr Weale was signalling in his speech that policy is currently right: “These were not the words of someone who is on the cusp of supporting aggressive monetary loosening.
“At the same time, Mr Weale warned that an obsessive focus on inflation control, which at the current juncture would be likely to push unemployment higher, could cause longer-term damage to the economy, and considered that the MPC had been striking the right balance with its policy setting.”
Reprising outgoing Governor Sir Mervyn King’s famous quote to reject any suggestion that rates should be raised or the £375bn quantitative easing (QE) programme unwound, Mr Weale said: “On any reasonable trade-off between inflation volatility and output volatility, the benefits of not being an inflation nutter far outweigh the costs.”
His comments followed suggestions by the International Monetary Fund and the Bank for International Settlements, global regulators, that QE might now pose more risks to the economy than stimulus. Jamie Caruana, head of the BIS, said: “Refocusing the policy mix to rely more on repair and reform and not to overburden monetary policy is crucial because the balance of risks of prolonged very low interest rates and unconventional policies is shifting.”
Mr Weale also sounded a more upbeat note on the economy. “No one can be certain but it is possible that the near-stagnation of the past three years is being replaced by a move to modest growth,” he said. “We have had some good news recently. But, after a long cold spring, we need to see more than one swallow before being sure that summer has come.”
Although Mr Weale insisted there was good reason to keep monetary policy loose at the moment, he explained that the Bank does not have the same freedom as the US Federal Reserve to act because inflation has been below target in just six of the past 51 months. The US has been below target for 27 of those months.