Posen Makes BOE `Prosecution' Case for Stimulus to Aid Growth
Bank of England policy maker Adam Posen made the strongest call yet for the bank to restart its asset-purchase program.
U.K. growth is so far below its potential that failure to take action could entrench a slow rate of economic expansion, Posen said in a speech yesterday in Hull, England. That threat supports the case for further stimulus by buying government debt after the central bank kept its bond-purchase program at 200 billion pounds ($316 billion) for the past 11 months, he said.
Posen’s call for more economic aid conflicts with the push for higher interest rates by his colleague Andrew Sentance, who is focused on inflation that’s held above the bank’s 2 percent target for nine months. The debate sets the stage for the panel’s first three-way split on a policy decision since November and comes as the U.S. Federal Reserve and Bank of Japan also consider additional steps to support their recoveries.
“He’s saying this is the case for the prosecution, and let’s consider it at the next meeting” said David Owen, an economist at Jefferies International Ltd. in London. “I’d stick with our forecast for no change to the asset-purchase target, but the risks are now much more balanced.”
While data yesterday confirmed the British economy expanded at the fastest pace in nine years in the second quarter, the International Monetary Fund said on Sept. 27 the Bank of England should restart asset purchases if the recovery falters.
U.K. policy makers signalled this month that they’re closer to adding stimulus after holding the key rate at 0.5 percent and leaving the bond plan unchanged. They will hold their next policy meeting on Oct. 7.
“There remains a significant gap between what the economy could be producing at full employment and it currently produces,” Posen said. “Monetary policy should continue to be aggressive about promoting recovery, and, subject to further debate, I think further easing should be undertaken.”
The pound, which dropped 1.1 percent against the euro yesterday, was little changed at 86.04 pence as of 8:55 a.m. in London. It gained 0.1 percent versus the dollar to $1.5823. Bonds rose for a third day, with the yield on the 10-year gilt falling 2 basis points to 2.92 percent.
Sentance, who has called for a quarter-point increase in the key rate since June, said yesterday a resumption of so- called quantitative easing would be a mistake.
“Doing more QE would give the wrong impression on the state of the economy,” he said in a newspaper interview in Nottingham, England. “I actually think we should be preparing the ground for gradually increasing interest rates in a measured way to reflect the fact that the economy has improved and the inflation situation is not where we would like it to be.”
Posen has always voted with the majority on the nine-member rate-setting panel since he joined in September 2009, deciding in 12 of 13 meetings for no change in the key rate or the target for asset purchases.
“It’s shaping up to be a bun fight between Sentance and Posen,” said Howard Archer, chief U.K. and European economist at IHS Global Insight in London. “There’s a very strong chance you’ll see a three-way split.”
The committee’s last such split was in November when the majority, including Posen, voted to increase the bond plan by 25 billion pounds to the current target. At that meeting, Chief Economist Spencer Dale voted for no change to the amount of bond purchases, while David Miles argued for a 40 billion-pound increase in the plan.
Posen said yesterday that officials should “not settle for weak growth out of misplaced fear of inflation” and the current “overshooting” above the government’s 3 percent limit won’t last. Inflation will probably be “well short” of the central bank’s 2 percent target in 2012 and 2013, he said.
The U.K. central bank should consider buying gilts in its initial effort to add stimulus, though purchases of private assets may be needed later, he said.
“Additional monetary stimulus at this point should begin in the form of additional QE as the Bank of England pursued by purchasing gilts in 2009-2010,” he said. “In case such QE were to prove insufficiently effective,” Posen said he would “still want preparation ahead of a Plan B of large-scale non-gilt asset purchases” in close coordination with the Treasury.
The argument for more stimulus is not based on new forecasts or signs of a double dip, but on studies of recoveries after previous crises in Japan and the U.S., he said.
Posen, 43, an American citizen, joined the central bank from the Washington-based Peterson Institute for International Economics. A co-writer of a book on inflation targeting with Fed Chairman Ben S. Bernanke, he also published a study of the Japanese financial crisis and was a researcher at the Bundesbank and European Central Bank.
“Economic recovery following a financial crisis is a long process dominated by the interaction of unemployed resources, dysfunctional banking systems, and the degree of policy stimulus,” he said. “We are a long way from home, and a long, long way from overheating.”
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