McCafferty Says BOE Must Keep Open Mind on New Policy Tools

Bank of England policy maker Ian McCafferty said officials must have an open mind about ways to help the recovery, signaling he may support new measures if needed to target specific weaknesses in the economy.

“We need to be open to considering other unorthodox means to conduct monetary policy if they become necessary,” McCafferty said in an interview with Guy Johnson on Bloomberg Television in London today. “To the extent that we monitor the economy over the coming year, if it is not starting to improve as we expect, then I think we would need to consider what are the very specific problems that still exist in the economy and to what extent can very targeted monetary policy measures deal with very specific problems.”

McCafferty also said the Bank of England’s current mandate is “relatively flexible” and that a nominal gross domestic product target may only be of use as a temporary measure in “unusual circumstances.” Bank of Canada Governor Mark Carney, who is scheduled to take over from Governor Mervyn King at the Bank of England later this year, has discussed the virtues of targeting a nominal level of GDP as a policy tool.

“It’s of use in very unusual circumstances,” McCafferty said. “I don’t think nominal GDP targeting is a better signal than other methods, and I think there are distinct problems with it, certainly in terms of measurement, because as we know GDP is heavily revised even in the relatively short term, so it is perhaps less precise.”

New Tools

The use of new policy tools may be a discussion for the Monetary Policy Committee this year as the economic recovery struggles to gather pace. The National Institute of Economic and Social Research estimates that GDP fell 0.3 percent in the fourth quarter and data today showed retail sales unexpectedly fell in December as consumer weakness persisted into the key Christmas trading season for British stores.

“We need to keep an open mind to see exactly where any sticking points in the transmission mechanism occur and, if necessary, design new policies in order to address those,” McCafferty said.

Asked about the pound and whether he would favor a weaker level to help exports, McCafferty said that competitive currency devaluation “can be self-defeating because they can lead to others trying to do the same, and of course ultimately exchange-rate policy is a zero-sum game.”

Competitive Pound

Still, there “are questions on whether sterling is now at a competitive level in terms of allowing that fundamental rebalancing,” he said. McCafferty added that sharp movements by currencies “in either direction can be destabilizing” and that there were other factors affecting overseas sales.

“My impression is the lack of export performance is as much due to lack of demand in our major markets and the fact that our main exports are oriented at relatively slow-growing markets at the moment,” he said.

In a speech after the interview, McCafferty said uncertainty may limit the impact of quantitative easing on demand and it’s “important to consider other forms of monetary easing.”

Policy makers must look at other measures “and whether they, in today’s specific circumstances, might be more effective if needed,” he said in the speech.

The official, who joined the MPC in September from the Confederation of British Industry, also said the inflation outlook is complicating policy makers’ decisions and price growth may cool “only slowly” toward the BOE’s.

“There is a risk that, as the economy recovers, companies will feel obliged to reward their staff for their forbearance of recent years and compensate them for the recent squeeze in living standards with more generous pay increases,” he said. “What we can conclude is that the longer inflation remains elevated, and hence the greater the cumulative squeeze on real incomes, the greater the risk of such generosity.”

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