BOE’s Dale Shows Concern More Stimulus May Fuel Inflation

Bank of England Chief Economist Spencer Dale said there’s a risk that more stimulus could stoke consumer-price gains and he defended the current inflation targeting remit as flexible enough to aid economic growth.

“The argument that monetary policy can be used to expand demand with little or no implications for inflation challenges the consensus that the best contribution that monetary policy can make to the long-term health and prosperity of the economy is to deliver price stability,” Dale said in a speech at the central bank in London today. “We should be nervous about how quickly we overturn that consensus.”

His comments come five days before Chancellor of the Exchequer George Osborne presents his annual budget, when he may rethink the BOE’s remit. Dale said while it’s right that inflation targeting “should be questioned and challenged,” policy makers must take account of the potential economic costs of letting inflation get out of control.

“The best contribution monetary policy can make to sustainable growth and long-run prosperity is to deliver enduring price stability,” he said. “That is important to remember in the face of suggestions that inflation is somehow yesterday’s battle. Without credibility, there can be no flexibility.”

The debate on inflation targeting and the use of new policy tools was sparked by Bank of Canada Governor Mark Carney, who will replace Mervyn King as BOE head in July. Since his appointment was announced in November, Carney has said central banks aren’t “maxed out” and that he sees his role as aiding a Bank of England “re-founding.”

‘Free Lunch’

Questioning the argument that additional stimulus can be provided without fueling inflation, Dale said the idea is “seductive and enticing” and “like being offered a free lunch.”

“There are some grounds for thinking that the trade-off between growth and inflation may well be unusually favorable,” he said. “But how strong those mechanisms actually are, is far from clear.”

The pound rose for a third day against the dollar and was up 0.5 percent to $1.5155 as of 11:40 a.m. London time. It’s still down about 6.7 percent against the U.S. currency this year.

Dale, who was reappointed this month for another three-year term, said the inflation target and the Monetary Policy Committee “are the result of a long and painful search for a credible money anchor.”

“They provide the memory to ensure that we don’t return to the inefficiency and inequity of the 70s and 80s,” he said. “They provide the memory that underpins the consensus that low and stable inflation is a perquisite for economic prosperity. And they provide the memory that guards against some of the dangerous talk of late.”

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