Broadbent Says Inflation Threat Justified BOE Stimulus Halt
Bank of England policy maker Ben Broadbent said the central bank’s decision not to increase stimulus this month was justified by the outlook for inflation, which may cool less quickly than previously forecast.
“We still anticipate a decline” in inflation, “but it looks to be taking slightly longer than we had first thought it would,” Broadbent said in an interview with Bloomberg Television’s Linda Yueh in London. “My answer to the questions as to why policy didn’t change in May: the forecast didn’t warrant it.”
The Bank of England stopped expanding stimulus this month and Broadbent said that loosening policy again “remains a possibility” if needed to counteract threats from the euro-area debt crisis. While the economy may shrink for a third straight quarter because of the extra public holiday for the Queen’s Jubilee next month, he said policy makers will be focusing on the “underlying” picture of the economy.
The impact of the Jubilee and the Olympics on the “appropriate monetary policy is more or less zero,” he said. “These are things that shift measured output, but won’t change to any degree our understanding of what underlying inflation pressure is in the economy and what response we may make.”
The complication for the Monetary Policy Committee will be in deciding “what the underlying picture is,” according to Broadbent, a former Goldman Sachs Group Inc. economist who joined the central bank a year ago.
Bonds fell, with the yield on the 10-year gilt rising 2 basis points to 1.783 percent as of 8:28 a.m. in London. The pound gained 0.2 percent against the dollar to $1.5707.
In a speech late yesterday, Broadbent said the central bank will respond if the worst euro-area risks are realized, while acknowledging there is a limit to what it can do. He also said that the “most important policy decisions affecting the U.K. are being taken in other parts of the continent.”
“Were the still unlikely worst-case risks in the euro area actually to be realized, then our own monetary policy would again play its part in mitigating the impact,” he said. “While they are both necessary and effective, these domestic interventions have their limits.”
The MPC held its target for so-called quantitative easing at 325 billion pounds ($510 billion) on May 10 after expanding it in October and February. It also kept its benchmark interest rate at a record-low 0.5 percent. While U.K. inflation slowed to 3 percent in April from 3.5 percent in March, that’s still above the central bank’s 2 percent target.
“As far as more QE goes, that possibility is certainly there,” Broadbent said in the interview. On its potential impact, he said, “I don’t think there’s any reason to suspect that QE is either ineffective or less effective than on the first round of asset purchases.”
While the economy is on a “less predictable path,” and that makes judging the appropriate response more difficult, “I don’t think it means policy itself is less effective,” he said.
Asked whether the MPC should cut its key rate further, Broadbent said policy makers have discussed the possibility, but decided against it as there is a risk of some negative effects.
“There are many banks whose assets income depends directly on the rate of interest we set, so if you lower that, one thing you may do is reduce margins,” he said. “So it’s not clear all the effects are beneficial. So that’s why the MPC has thought about this and decided against it.”
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