BOE’s McCafferty Says More Easing Will Likely Be Required

Will BOE's Policy Measures Have Desired Impact?
  • Limited information making Brexit assessment difficult
  • McCafferty writes opinion piece for The Times newspaper

Bank of England policy maker Ian McCafferty said that officials will likely ease policy again if the economy develops in line with the central bank’s forecasts -- though they should take a gradual approach.

“More easing is likely to be required” if the U.K. economy slows as initial survey data suggests, McCafferty said in an opinion piece published in The Times newspaper. Even so, “easing policy further, until we are more certain of the balance between lower growth and rising inflation, risks pushing inflation yet further above the target.”

McCafferty’s comments follow the BOE’s decision last week to reduce its key interest rate to a record-low 0.25 percent and to restart government-bond purchases to counter the economic fallout from the country’s decision to leave the European Union. Officials face a trade-off between boosting growth -- which they forecast at just 0.8 percent next year -- and stabilizing inflation, which they see reaching the bank’s 2 percent target in the final quarter of next year.

McCafferty joins several other policy makers who have cited the difficulty in calibrating the right policy response to Brexit while information about the economy remains limited. The full fallout from the referendum won’t start showing in official statistics until the middle of this month, though initial surveys of business activity, consumer confidence and business sentiment have all plunged since the vote.

As recently as January, McCafferty was voting to raise rates. He opted to increase borrowing costs in the six meetings from August 2015.

While he was in favor of the rate cut at the Monetary Policy Committee’s latest meeting, McCafferty was one of three officials to vote against more QE. Opposing the move, those policy makers said recent surveys “may overstate the weakness of the economy” and more bond purchases could cause inflation to overshoot.

According to the minutes of the meeting, McCafferty also said any decision to revive QE could be made at future meetings once the nine-member MPC had more information. In the editorial, he said the central bank should follow a gradual approach in how it responds to Brexit given that information on the U.K. economy’s exact reaction to the vote “is still very limited.”

The pound fell for a fifth day after the editorial was published, falling 0.4 percent Tuesday to $1.2995 as of 10:22 a.m. in London. The BOE bought 1.17 billion pounds of gilts on Monday, the first day of its newly topped-up asset-purchase program. The additional purchases are due to be completed in six months.

The BOE’s rate cut on Thursday was its first in more than seven years, and the QE program had been dormant since 2012. The bank also cut its economic growth forecasts last week and Governor Mark Carney said more easing could come later this year.

The central bank’s monetary policy committee “faces a set of economic circumstances that make assessing the appropriate amount of policy stimulus more difficult,” McCafferty said. “I prefer to learn as we go, providing some stimulus while using our available ammunition cautiously.”

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