Report to the Treasury Select Committee
from Paul Tucker, Deputy Governor Financial Stability, Bank of
England
VOTING RECORD
My last report was in March 2009. The global economy
had entered a precipitous downturn, following a global financial
crisis that had led to a seizure in markets, a widespread credit
crunch, an evaporation of confidence and a dramatic decline in
world trade. Towards the end of 2008, I had wanted to get Bank
Rate as close to "zero" as practical as quickly as possible,
so that we could introduce Quantitative Easing (QE) while inflation
was expected to remain positive. That meant that the real return
on the money injected into the economy would be negative and so
was less likely to be hoarded. I was also keen that we should
put the money into the hands of the non-bank financial sector
by buying bonds directly from them, so that we did not have to
rely on the banking system on-lending the extra reserves.
In May 2009 I voted to increase QE from £75
billion to £125 billion; in August for £175 billion;
and in November for £200 billion. Those first two decisions
followed a series of materially weaker than expected outturns
for demand and activity, which signalled greater spare capacity
and thus a weaker inflation prospect. By November 2009 the decision
was more finely balanced in some respects. The risk of the UK
spiralling down into the abyss of Depression had receded, with
the world economy showing signs of recovery, particularly in Asia,
and the survey data in the UK starting to look a little more positive.
But the 2009 Q3 GDP data had disappointed. I therefore supported
the case for a further moderate expansion of QE, arguing against
a bigger increase.
Since November 2009 I have voted each month to maintain
Bank Rate at 0.5% and to maintain QE at £200 billion. Back
in February, I said in a speech that it would take at least until
the middle of the year to have much of a sense of whether growth
would be anaemic or robust enough to begin to absorb the slack
in the economy. My view of the current position is "so far,
so good". To date, growth has been a little stronger in 2010
than projected. The UK banking system has made more progress with
repairing its balance sheet than many expected. Capital markets
have been open for many companies. That has enabled the repayment
of bank loans, meaning that bank deleveraging has been less malign
than had been possible, and that weak broad money growth has not
obviously signalled incipient weakness in nominal demand.
Earlier in the year, I had half expected by now to
be withdrawing some of the exceptional monetary stimulus. As it
has turned out, recent softening in the near term outlook has
warranted maintaining an unchanged stance so as not to dent the
recovery of confidence. But further monetary stimulus has not
been warranted to date as the recovery has seemed intact and,
crucially, inflation has stayed stubbornly high.
THE OUTLOOK
Inflation is likely to remain above the 2% target
into 2011, as companies pass on higher costs from imports and
the forthcoming increase in VAT. Beyond that, the continued margin
of spare capacity - much of it probably within firms due to labour
hoarding - is likely to put downward pressure on prices. A key
issue, therefore, is whether the slack will, in fact, gradually
diminish.
Survey evidence points to somewhat more moderate
growth in the near term. Governments in the UK and elsewhere have
had to address financial market concerns about large budget deficits.
Ahead of the initial Greek crisis my view was that the UK needed
to insulate itself from the risk of a chain of contagion-by-similarity
from one country to another. This is best thought of as an insurance
policy, where the insurance premium is, effectively, some withdrawal
of demand from the economy. The considerable stimulus from monetary
policy, alongside solid growth in parts of the world and the past
depreciation of sterling, should still support the recovery. But
there are significant risks to the inflation outlook.
On the downside, a marked deterioration in the rest
of the world or a return of inhospitable financial market conditions
could mean that net trade did not provide the expected boost.
And households might strengthen their balance sheets rather than
spend.
On the upside, there is a risk to inflation expectations.
Although the persistently high inflation outturns are basically
due to factors that should have only a temporary affect, a rolling
sequence of price level shocks is not easy to explain to the public
or businesses. That is especially so when commodity prices, and
so input prices, could easily continue to rise given robust growth
in Asia. It is, therefore, absolutely vital for the MPC to be
unwavering in our commitment to low and stable inflation over
the medium term. Only if we maintain our credibility can we be
effective in supporting the recovery of demand and activity.
EXPLAINING MONETARY
POLICY
Since my previous report in March 2009 I have given
three on the record speeches dealing with monetary policy issues,
and around ten other published speeches/talks on broader central
banking topics. I have also given twenty to thirty off-the-record
talks on monetary policy and financial stability. I have made
five visits to companies in UK regions outside London - Cambridgeshire,
Manchester, Southampton, Edinburgh and Oxford. I have had regular
meetings, both in the UK and overseas, with other central bankers
to discuss monetary policy, as well as representing the Bank at
the ECB General Council, the BIS and the Financial Stability Board.
I have maintained extensive contacts with the business and financial
communities here and overseas. I have spent a good deal of time
with all these groups explaining how the Bank's monetary policy
and planned new macroprudential responsibilities will fit together.
25 November 2010
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