Miles Says BOE Should Probably Loosen Policy to Bolster Recovery
“A good case can be made for more expansion,” Miles said in a speech late yesterday in Bath, England, adding that asset purchases are not the only possible stimulus. “If there are monetary-policy tools that are more reliably effective in boosting demand, they should be used.”
Miles, along with Governor Mervyn King and Paul Fisher, was in the minority on the Monetary Policy Committee on Feb. 7 when he voted to increase quantitative easing by 25 billion pounds ($38 billion). As Bank of Canada Governor Mark Carney, who will succeed King in four months, spurs debate about policy options, the MPC discussed steps from interest-rate cuts to measures to boost credit at their meeting this month.
In his speech, Miles used a model to calculate what the “optimal policy” for the U.K. should be given several variables. His “base calibration” suggests that it should 16 percent more expansionary, or the equivalent of about 60 billion pounds of bond purchases if implemented through QE.
Under this policy, “toward the end of the forecast horizon, the expected rate of inflation is somewhat higher than at unchanged policy and slightly above the target level, and the output gap is negative, so, the economy is likely to be operating a bit above capacity,” Miles said.
In one scenario in his model in which the economy is running below capacity by more than expected, policy makers may need to increase QE by as much as 175 billion pounds, Miles said. The central bank has bought 375 billion pounds of gilts since it began its QE program in March 2009.
Britain’s economy shrank 0.3 percent in the fourth quarter and King has forecast a “slow” recovery. Against that backdrop, the MPC has said it’s right to “look through” the protracted period of inflation above the BOE’s 2 percent target.
In response to audience questions, Miles said that while he hopes the central bank can begin to normalize policy “not too far down the road,” officials shouldn’t start to think about that until the economic recovery has “some legs.”
In his speech at the University of Bath, Miles said that the central bank’s current policy remit is “not restrictive” and “allows inflation to deviate from target if this avoids excessive fluctuations in output.”
“There are no explicit guidelines for the period when inflation needs to return to target,” he said. “But the MPC needs to justify that its strategy is consistent with the spirit of the remit.”
Miles said that inflation, which was at 2.7 percent in January, “may go a bit higher” in the near term. Still, “output and productivity remain far below trend; growth over the past year or so has been close to zero.”
While U.K. inflation expectations haven’t moved “dramatically,” policy makers must explain why price gains have deviated so far from target and convince people that they haven’t “lost sight” of their goal, Miles said in response to audience questions. He added that consumers should be able to increase spending this year as a squeeze on real incomes eases.
On productivity, Miles said the decline “has been a reflection of very weak growth.”
“Starting from the specific situation in which we are today, where productivity appears to have collapsed following the decline in demand, I believe that some of the productivity loss is cyclical,” he said. It “could be regained if demand and output were to pick up again in the near future.”
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