Report to the Treasury Select Committee
from Professor David Miles, External Member, Monetary Policy Committee
VOTING RECORD
In the last year I have voted to expand the
size of the Bank's asset purchases, and then to maintain them
at £200 billion and hold Bank Rate at 0.5%.
I joined the MPC following exceptional falls
in output and substantial increases in unemployment. Although
output stabilised in the second half of 2009 the level of GDP
in the first quarter of 2010 remained more than 5% below its pre-recession
peak. CPI inflation fell to 1.8% in June 2009 remaining below
target until December and then rising to above 3%. But I believe
underlying domestically generated inflationary pressures are not
strong. Although there may have been some reduction in the supply
potential of the UK economy the scale of the decline in the level
of GDP suggests that spare capacity remains substantial.
Following the financial crisis the balance sheet
of the UK banking system has been impaired. We are still on an
adjustment path towards a sustainable pattern for the price and
availability of credit. Asset purchases, and maintaining a low
level of Bank Rate, are a means to stimulate spending, smooth
the adjustment taking place within the financial sector and limit
the impact of that adjustment on the broader UK economy. I believe
that the Bank's asset purchases have contributed to the recovery
of many asset prices, particularly of corporate bonds and equities,
and have helped boost issuance of such assets by non-financial
companies.
I voted to expand the size of the asset purchase
programme to £200 billion at the MPC's August 2009 meeting
and to £215 billion in November. I believed that increasing
the size of asset purchases to £215 billion would provide
greater insurance against the downside risks to growth and inflation
from constrained credit supply. In some respects these risks have
diminished as UK GDP growth has stabilised. This is why I have
subsequently voted to keep the stock of assets purchased at £200
billion. However, recent events in sovereign debt markets and
in bank funding highlight the downside risks. Further asset purchases
may be warranted at some point in the future.
CPI inflation has increased to above the 2%
target. In large part, the increase in CPI inflation has been
driven by rising commodity prices (particularly energy costs),
import price increases in the wake of the large sterling depreciation
in 2007 and 2008, and by changes in VAT. The recent increase in
inflation does not reflect rising inflationary pressure stemming
from demand outstripping supply in the economy. I believe that
the underlying domestic inflationary pressures—once we strip
out what are likely to be temporary effects (eg from VAT changes)—have
not been strong. Wage pressures have been subdued, with settlements
generally below 2%, despite a rise in household's near-term inflation
expectations.
THE OUTLOOK
The economic outlook remains unusually uncertain.
Hence, in setting monetary policy it is important to consider
both upside and downside risks.
The banking sector remains fragile. Recently,
concerns in sovereign debt markets focusing on the sustainability
of fiscal policies in some European countries have led to tightening
bank funding conditions. Conditions in the euro area are particularly
important for the UK given its importance as an export market.
In the UK net lending to individuals and non-financial companies
has remained weak so a renewed tightening in credit conditions
could have a significant impact on demand. If so, demand may pick
up very slowly so that the degree of spare capacity in the economy
continues to push down on prices in the medium term and CPI inflation
falls back below the target.
This does not mean that I am comfortable with
the current high rate of inflation. We continue to face the problem
of balancing risks: risks that inflation above target lasts long
enough to become ingrained in expectations and affect behaviour
so that it is hard to bring down, versus risks that the recovery
in output becomes weaker and then disappears, leaving inflation
pressures lower than is consistent with the target further ahead.
There is a risk that a protracted period of
high CPI inflation could lead to higher inflation expectations
becoming entrenched. So far, measures of households' medium-term
inflation expectations have not increased much and there is little
evidence that any rise in inflation expectations has led to higher
wage growth. Without a pick up in wage inflation I do not think
it likely that inflation being significantly above target is sustainable.
Of course wage pressures may build significantly over the next
year, though I do not believe this is the most likely outcome.
Risks of an extended period of low growth—which would further
weaken those pressures—are also real.
EXPLAINING MONETARY
POLICY
Over the past year I have made several visits
to areas outside of London, including Northern Ireland, Scotland,
the Southwest and Wales. I met a range of companies and talked
to business groups to hear their views on the economy. These meetings
were extremely helpful, particularly in understanding the impact
of the credit crunch on smaller and medium sized companies.
To communicate my views on monetary policy more
widely I have given several interviews (to amongst others the
Belfast Telegraph, Independent, South Wales Evening Post, Sunday
Herald, Daily Mail, Financial Times).
I have also spoken at a number of schools to
explain monetary policy.
My published speech in Bristol on Wednesday
14 July was my fourth in the last twelve months. I have considered
it particularly important to explain the MPC's asset purchase
programme (quantitative easing) to the public. I discussed the
efficacy of the asset purchase programme in my speech in Belfast,
in August last year and at Imperial College London in February
this year. A key consideration in formulating monetary policy
has been the adjustments taking place in the financial sector
which I discussed in my speech at Bloomberg in London in December
and recently in Bristol.
July 2010
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