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Bank of England’s Adam Posen renews calls for more quantitative easing

MPC ‘dove’ says above-target inflation is no reason to hold back on QE

Adam Posen, the Bank of England’s leading “dove”, has urged his colleagues on the monetary policy committee to urgently engage in a new round of quantitative easing to boost Britain’s flagging economy.

Warning that Threadneedle Street and the central banks from the other G7 countries might have already waited too long to act, Posen said the UK’s above-target inflation rate should not be a barrier to immediate action.

“Make no mistake, the right thing to do right now is for the Bank of England and the other G7 central banks to engage in further monetary stimulus,” Posen said in a speech in Gloucester. “If anything, it is past time for us to do so.”

The American economist said the outlook had turned out to be just as grim as historical precedent had suggested – based on the nature of the recession, attempts to cut budget deficits and the fact that all western economies were facing the same sort of problems.

“Sustained high inflation is not a threat in such an environment, and in fact the inflation that we have suffered due to temporary factors in the UK is about to peak.” Official figures released on Tuesday showed that the annual rate of inflation as measured by the consumer prices index rose from 4.4% to 4.5% in August, equalling its highest level in almost three years.

Posen, who has been a lone voice calling for more quantitative easing this year, said: “If we do not undertake the stimulative policy that the outlook calls for, then our economies and our people will suffer avoidable and potentially lasting damage.” The Bank voted against increasing the QE programme at its September meeting last week, although the City believes that the as-yet unpublished minutes will show that Posen finally received some support from fellow MPC members.

Posen argues that the fragile state of the UK economy means the Bank of England needs to be bold.

“At present, when there is too much risk aversion in the private sector, the British public can ill-afford unjustified risk aversion on the part of its monetary policymakers as well,” Posen told his audience.

With interest rates already at a record low of 0.5%, Posen said more QE was the way to boost the economy and hasten its restructuring, particularly if the current £200bn programme was extended significantly. He called for more co-operation between the Bank and the government to ensure that the monetary boost led to higher investment and increased credit flows to small and medium-sized businesses. Posen said the UK needed a “public bank or authority for lending to small business” of the sort already in existence in the US and Germany.

“Monetary policymakers must also free themselves from unfounded concerns and take these necessary actions. There are too many excuses for passivity being offered, none of which stand up to scrutiny or to the data,” he said.

“In essence, central banks can improve matters by doing more, even if we have to act alone. In so doing, we would make constructive actions by other policymakers in the fiscal and financial arenas outside of our remit more – not less – likely, and those actions more likely to succeed when undertaken.”

Posen said the outlook for the economy was poor: “In what should have been an unsurprising development, given the situation, UK consumption growth has fallen off a cliff. When real incomes are falling because of the potent combination of shocks to purchasing power (even if one-time, not trends), weak earnings growth, and consumption tax increases, households will cut back on consumption.”

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