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BOE’s Miles Says Spare Capacity Will Depress Price Pressure

Bank of England policy maker David Miles said spare capacity will continue to weigh on Britain’s “very muted” domestically-generated inflation pressures.

“There is a margin of spare capacity in the U.K. economy which has been, and will continue, depressing domestically generated inflation pressures,” Miles said in a speech late yesterday in Arlington, Virginia. They “are a good indication of where the underlying inflationary forces are and it is because they look very muted that monetary policy has been loosened over the recent past.”

Miles and Adam Posen were defeated in a bid to increase bond purchases by a further 25 billion pounds ($40 billion) earlier this month. The majority of the nine-member Monetary Policy Committee favored waiting to monitor the “substantial risks” to the medium-term inflation outlook.

Miles said concerns about debt monetization and its inflation implications, while understandable, are “misplaced.” Fostering economic growth without fueling inflation pressures is the best way of cutting government debt, he said.

“The best way that monetary policy can help improve the fiscal positions in the current environment is also by trying to create the conditions for non-inflationary growth,” Miles said. “In a situation with slack in the economy -- such as exists in the U.K. and the U.S. and across much of Europe -- there is no inconsistency between the monetary policy to keep inflation low and one that helps stimulate demand and growth.”

Stimulus Exit

The pound slipped 0.1 percent against the dollar and was trading at $1.5951 as of 8:33 a.m. in London. It was at 83.60 pence per euro, little changed from yesterday.

Bank of England Governor Mervyn King and policy makers Ben Broadbent and Paul Fisher are due to speak at a committee hearing at Parliament’s House of Lords at 3:30 p.m. today. Posen, who voted with Miles for more stimulus this month, is due to make a speech in London at 6 p.m., while Bank of England Chief Economist Spencer Dale is speaking at a conference in Cambridge, England.

Miles said the Bank of England’s decision on the timing of reversing its asset purchases will depend on the outlook for inflation.

The “exit point” from quantitative easing and the time when the Bank of England’s balance sheet will begin to shrink, is “not fixed,” he said. “It will be determined, as all monetary policy decisions are, by how the outlook for inflation in the medium term evolves.”

Gilt Defense

Miles also defended the central bank’s decision to buy gilts rather than corporate bonds as part of its stimulus program, saying it’s “consistent with that stated objective” of boosting demand.

“The MPC can encourage the flow of credit to the real economy by purchasing government bonds” and “a significant part of the fall in spreads on sterling corporate bonds is specifically linked the Bank of England’s purchases of gilts,” he said.

He also said that when policy tightening begins, it’s “likely” it will done first with interest-rate increases. He said central banks, including the European Central Bank and the Federal Reserve face a “tricky task” in deciding how long to keep policy at an “exceptionally expansionary setting.”

“The challenge here is not because of any practical difficulties in unwinding asset purchases,” he said. “It is the much more fundamental and timeless one of assessing the outlook for the economy and judging the appropriate monetary stance.”

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