Posen Sees BOE Putting QE on Hold ‘Indefinitely’
In his first interview on the outlook for U.K. monetary policy since leaving the Bank of England in August, Posen said officials won’t extend their 375 billion-pound ($601 billion) bond-buying program. Some officials’ hopes that credit-boosting measures such as the Funding-for-Lending Scheme will provide an adequate stimulus, and the bank’s transition to a new governor, also are contributing to the hiatus, he said.
“Central banks shouldn’t be afraid to make mistakes or change their minds when the data changes, but the data hasn’t changed,” Posen said in London last week. “I fear they’re going to be on hold indefinitely.”
Posen said the change in attitude -- reflected in recent comments from policy makers including Deputy Governor Paul Tucker -- was “bizarre” and akin to “talking themselves into policy defeatism.” The Bank of England stopped buying gilts in November after completing a final 50 billion-pound round.
“For us to have said, rightly but bravely, we’re going to do QE when inflation was well above target, and now, when inflation is at and going below target except for a little fluctuations, for them not to do QE, then that’s just bizarre,” he said.
Posen, an American citizen who turns 46 this month, spoke in the same week that another foreigner was linked to the U.K. central bank as news emerged that Bank of Canada Governor Mark Carney will succeed Mervyn King as Bank of England chief from next July. Posen wrote in a Dec. 1 article in the Financial Times that Carney will need “to prioritize public engagement and open debate” in his new role.
“Anyone who needed to be wooed with promises of a 60 percent salary rise over his predecessor’s, as well as London living expenses in order to have the honor of serving as governor, will have an uphill climb to be perceived as a British public servant rather than a globetrotting corporate free agent,” he wrote.
Posen led the charge for the Bank of England to restart quantitative easing during his three years at the central bank, finally winning over the rest of the Monetary Policy Committee in October 2011. He will formally take over as head of the Washington-based Peterson Institute for International Economics in January.
On Aug. 1, the central bank implemented a new credit boosting scheme, the so-called FLS. In September, Tucker said the asset-purchase program no longer has “the same bite.” By October, officials’ disenchantment with QE had become increasingly apparent, with minutes of the Oct. 3-4 meeting showing that some members questioned the impact future gilt purchases could have. In November, the MPC voted 8-1 to stop expanding the plan, with only David Miles calling for a 25 billion-pound expansion.
While Posen said in the interview that the U.K. will avoid returning to recession and the economy’s underlying pace of expansion is better than that predicted by the central bank and the Office for Budget Responsibility, expansion will be “mediocre.”
“We’re going to get no more recession,” said Posen. “We’re just going to have very mediocre growth.”
Posen said rather than suspending QE, the Bank of England should diversify asset purchases into corporate bonds and securitized loans, and stand ready to support any government push for aggressive business lending. He rejected the idea of an interest-rate cut as “fiddling” and no substitute for more QE.
It would also “not hurt” for the central bank to encourage more competition in the banking sector, he said.
Posen said that while it was difficult to gauge the true impact of QE, evidence suggests it “is doing what it’s supposed to do.”
The resistance within the Bank of England ignores the continued lack of wage gains, tame inflation expectations or the policy’s past success, he said. In expressing hope that the FLS will work, Posen said its existence was no reason not to be buying securities as well.
“There’s no reason to do watchful waiting for FLS,” he said. “It’s not like suddenly broad money growth is going to quadruple.”
Data today showed banks drew down 4.36 billion pounds from the FLS in the first two months of operation. Banks have 18 months from Aug. 1 to access the program.
Though recent comments from his former colleagues Miles and Markets Director Paul Fisher suggest they may be less opposed to more stimulus, in general “the debate seems to have moved in a very weird direction,” Posen said.
“This talk that we don’t see it working is just a counsel of despair, which is unjustified,” he said.
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