The Bank of England risks stoking inflation with little benefit to economic growth if it expands its so-called quantitative easing program of stimulus, former policy maker Kate Barker said.
“If rising inflation expectations have followed the use of QE, there is a risk that relying on monetary policy to ride to the rescue of faltering growth might be misplaced,” Barker said yesterday at an event held by Queen Mary College in London. More stimulus could “have more of an impact on inflation than on growth if it feeds through into higher inflation expectations.”
Barker called for a revamp of the Bank of England’s framework to consider the adoption of a broader target for inflation instead of the fixed goal of 2 percent. Bank policy makers have split three ways on the risks to consumer prices ahead of a public-spending squeeze which finance minister George Osborne will set out tomorrow.
“Achievement of the precise inflation target at a particular moment seems less important than supporting an overall economic outturn which minimizes the risk of a long period of low growth,” Barker said. “Some recasting of the target to ensure that there is sufficient flexibility might be the sign of a more mature monetary regime.”
Barker spoke at an event to unveil Queen Mary’s economics and finance school. The audience included Martin Weale, who replaced her after she ended nine years on the Monetary Policy Committee in May. Bank of England Governor Mervyn King will deliver a speech later today.
Consumer prices rose an annual 3.1 percent in September, the seventh consecutive month above the government’s 3 percent limit. Barker said that the MPC’s strict numerical mandate may have limited its capacity to address the factors leading to the financial crisis.
“With hindsight it is possible to wonder whether the focus on a precise target for CPI inflation was one of the factors that caused the MPC to pay less attention to the build-up of the various imbalances in the economy,” Barker said. She questioned whether “a broader price stability target rather than the present numeric target might at some time be adopted to allow a more strategic approach to policy.”
Simon Hayes, an economist at Barclays Capital in London and a former Bank of England official, said that the bank faces “credibility problems.”
“The first is simply to do with the high headline inflation rate and should you be loosening policy now,” he said. “The second is that rates are at 0.5 percent and you’re having to do QE instead of changing rates.”
Policy maker Andrew Sentance has argued since June that the bank should raise the key interest rate from the record low of 0.5 percent to battle inflation. His colleague, Adam Posen, says that officials should consider increasing the bond-purchase plan from the current 200 billion pounds ($317 billion) to support the economic recovery, and that expanding purchases to assets other than gilts may be necessary.
Barker said that during her time on the MPC she agreed with Posen’s argument that the range of assets to be purchased may need to be expanded. Still, the benefits of restarting stimulus were uncertain, even amid “indications that U.K. economic growth may be quite weak in the second half of 2010.”
The bond plan also creates a future challenge for policy makers because they will need to address the consequences of asset-price increases fuelled by their purchases, she said.
“To the extent that QE works through pushing up risky asset prices, a problem may be developing down the road about how an orderly downward move in these asset prices will be managed once it becomes clear that monetary conditions are returning to a more normal level,” she said.
Former policy maker Charles Goodhart said in an interview in London yesterday that the case for adding stimulus is not “cut and dried.”
“It will depend quite a lot on what the first estimate of third quarter GDP is” and “on what the reaction to the spending review itself is.” Gross domestic product data are due Oct. 26.
Barker was named yesterday as a non-executive director at Electra Private Equity Plc, a London-based buyout fund, and will take up the role on Nov. 1. Zurich-based bank Credit Suisse Group AG said Sept. 30 she had been appointed as a senior adviser in its fixed-income research division.
Barker stepped down from the MPC in May after serving three consecutive three-year terms on the panel. She was formerly an economist at the Confederation of British Industry, the U.K.’s biggest business lobby, and published reports for the former Labour government on the housing market.
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