Bank of England official David Miles said unemployment and slack in the economy will continue to put downward pressure on inflation and more bond purchases now could speed up a return to a more normal interest-rate level.
“Inflation is likely to continue to fall as domestically generated price pressures are restrained by downward pressure from unemployment and spare capacity, and the contribution of past energy and import price rises diminishes,” Miles said today in a speech in Manchester, England. He repeated the central bank’s projection last month that risks to inflation at the end of its forecast period are “broadly balanced” around its 2 percent target.
The Bank of England’s nine-member Monetary Policy Committee voted to raise its target for asset purchases by 50 billion ($80 billion) pounds on Feb. 9 after the economy shrank in the fourth quarter. Miles along with Adam Posen was defeated in a call for a larger increase at the meeting.
“Aggressively loosening monetary policy now might bring us closer to the point at which” the benchmark interest rate “could be moved back towards a more normal level,” Miles said today. “It might be the case that a path such as that could be a better one for the economy” and “this is an argument that influences the way I see monetary policy today.”
Miles’s speech comes after fellow policy maker Martin Weale said late yesterday that inflation may prove more persistent than expected, making it unlikely the economy will require further stimulus once the current round of bond purchases ends. U.K. inflation slowed to 3.6 percent in January, the least in 14 months, from a peak of 5.2 percent in September.
Weale’s comments were the most explicit indication by an official that the MPC’s latest increase in stimulus, which is scheduled to be completed in May, could be the last. Paul Fisher said on Feb. 26 that if recent positive economic developments continue, “that would put more weight onto the argument for stopping rather than carrying on” with bond purchases. Deputy Governor Paul Tucker said Feb. 28 that policy makers must be “alert to the need” to gradually withdraw stimulus when the economy strengthens.
Still, Governor Mervyn King said yesterday that any further loosening of policy will depend on how the economy performs.
Miles said asset purchases have helped the economy by boosting demand and increasing asset prices, making it easier for companies and households to borrow.
The policy maker also countered criticism that the quantitative-easing program was hurting the incomes of savers. The central bank’s bond purchases bolstered equity and corporate-bond prices in the U.K. over the past few months, he said, and that will have boosted the assets of pension funds.