BOE’s McCafferty Says U.K. Must Continue Fiscal Squeeze: Economy
Bank of England policy maker Ian McCafferty said Chancellor of the Exchequer George Osborne must maintain his fiscal squeeze as any easing could push up gilt yields and hurt the central bank’s efforts to boost growth.
“He needs to maintain the austerity program,” McCafferty, who joined the Monetary Policy Committee this month, told lawmakers at his appointment hearing in London today. “Otherwise, there are risks we would see disruption in financial markets and that would steepen the yield curve and significantly damage what we are trying to do” at the Bank of England, he said.
As Parliament’s Treasury Committee questioned McCafferty to seek clues on his policy leanings, he noted recent short-term economic disruptions and said he wanted to see more evidence before deciding whether the central bank should expand its so- called quantitative-easing program. Still, he also said inflation may ease at a slower pace than the BOE has forecast and that the economy may have “more momentum” than recent gross-domestic-product data suggest.
“We are in a position of significant uncertainty as to where the economy is,” he said, noting the impact on second- quarter GDP from an extra public holiday in June. “As a result, I would like to see more evidence before I make any decision on whether to continue with more QE or not.”
The Bank of England held its bond-purchase target at 375 billion pounds ($601 billion) this month. The program has helped to reduce U.K. government bond yields, with the 10-year gilt falling to a record-low 1.407 percent on July 23. The yield was at 1.73 percent today.
McCafferty is the former chief economic adviser at the Confederation of British Industry and replaced Adam Posen as a so-called external member of the MPC. Noting the impact on business confidence of the escalation in the euro-area debt crisis in late 2011, he said further developments in the region will play a part in any decisions on more stimulus.
On the fiscal squeeze, McCafferty said Osborne should wait for the Office for Budget Responsibility’s new economic and fiscal forecasts before deciding whether to alter his budget plans.
“I think it’s too early to decide until we see what the OBR estimates are,” McCafferty said. Should the OBR’s forecasts show a need for the chancellor to change his plan, “it’s going to be a difficult decision because he has to balance the need to deliver the fiscal program and maintain confidence of financial markets with the need to both ensure short-term demand.”
In written testimony to lawmakers, McCafferty said there are upside risks to inflation related to the recent increase in oil and food-commodity prices. The Bank of England sees the U.K. inflation rate falling below its 2 percent target in the fourth- quarter of 2013.
These increases “if sustained, may lead to inflation falling rather more slowly than set out in the Bank’s August forecast, posing a downside risk to the rate of U.K. consumer demand growth,” he said. “These downside risks are to a certain extent already built into existing forecasts of the outlook for the U.K. If they do not materialize, or are quickly resolved, growth in the U.K. economy may be higher than current projections.”
Separately today, the Office for National Statistics said Britain’s trade deficit narrowed more than economists forecast in July as exports soared the most in more than nine years. The goods-trade gap fell to 7.2 billion pounds from 10.1 billion pounds in June. Exports rose 9.3 percent, the biggest increase since January 2003, while imports fell 2.1 percent.
The pound rose against the dollar today and was up 0.2 percent at $1.6024 as of 12:44 p.m. in London.
Second-quarter economic growth was yesterday revised down to an annualized 0.7 percent from 1.4 percent, fueling concern a contraction is possible in the three months ending September.
Separate data showed cost-cutting by Japanese companies is dragging on wages, with nationwide compensation falling to 243.5 trillion yen ($3.1 trillion) in the second quarter. The number, which is seasonally adjusted, was only 0.7 percent above the level in the final quarter of 2009, which was the lowest since 1991.
In one positive sign, Japan’s largest manufacturers turned optimistic for the first time in four quarters, according to a government index released today.
Australian business confidence declined in August as a slowdown in global growth intensified pressure on the resources industry that drives the nation’s economy, a National Australia Bank Ltd. survey released in Sydney today showed.
Other economies in the Asia-Pacific region are showing signs of withstanding the slowdown. Philippine exports rose for a fourth month in July, a report showed today. New Zealand consumer purchases on debit, credit and store cards at retail outlets rose by the most since December 2002.
The U.S. will probably report a trade deficit of $44 billion in July, according to the median estimate in a Bloomberg News survey ahead of a report today.
In his testimony, the Bank of England’s McCafferty said the main risk to the U.K. economy stems from the euro-area crisis, while cooling global growth may also hamper the recovery.
“The risk of a deeper euro-zone recession hitting export demand from the U.K. has increased,” he said. “Recently, there have also been signs of a loss of economic momentum more widely, with both the U.S. and Chinese economies slowing since the early part of the year. If this were to persist into 2013, the outlook for the U.K. would be consequently weaker.”
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