Report to the Treasury Select Committee
from Spencer Dale, Chief Economist, Bank of England|
My previous report to the Treasury Select Committee
was in February 2010. Since then, I have voted at each meeting
to maintain the stock of purchased assets at £200 billion.
Until February 2011, I voted to maintain Bank Rate at 0.5%. Since
February, I have voted to increase Bank Rate by 25 basis points
Since the beginning of 2010, the economy is estimated
to have recovered modestly from the deep recession. But growth
around the end of last year slowed and that slower growth appears
to have persisted into the first half of 2011. The level of output
remains below its pre-crisis peak and the unemployment rate elevated.
At the same time, inflation has been well above the 2% target.
It seems likely that most of the strength in inflation over the
past year or so has stemmed from a series of price level shocks,
which should have only a temporary effect on inflation. As best
we can measure them, domestic inflation pressures appear to remain
relatively subdued. As such, the key task of monetary policy continues
to be to support the recovery and bring the economy better into
balance, thereby reducing the risk of inflation significantly
undershooting the target in the medium term. Even with Bank Rate
at 0.75%, monetary policy would remain highly stimulatory.
Since the time of my previous report, I have revised
down my medium-term outlook for the level of GDP. On its own,
this would have supported a further increase in the size of the
asset purchase programme. But I have also revised down my view
of the supply potential of the economy. Although highly uncertain,
developments in productivity and employment over the past year
suggest that the margin of spare capacity is probably lower than
I previously thought. This downward revision, together with further
increases in oil and other commodity prices and the rise in the
standard rate of VAT to 20%, contributed to a significant deterioration
in the outlook for CPI inflation.
In early 2011, I became increasingly worried about
the upside risks to inflation, from both the possibility that
global price pressures may continue to push up on inflation, and
the possibility that the sustained period of above target inflation
may start to cause some companies and households to question the
Committee's competence or commitment to control inflation. Despite
recognising the downside risks to the strength of the recovery,
these concerns about the inflation outlook caused me to vote for
an increase in Bank Rate to 0.75%.
My current view of the economic outlook is broadly
in line with the projections for GDP and inflation contained in
the May Inflation Report. I expect a continuing recovery
in the global economy to support growth in the United Kingdom,
alongside the considerable stimulus from monetary policy and the
current level of sterling. But the persistent squeeze on households'
real incomes is likely to weigh on demand, especially over the
next year or so. CPI inflation looks set to rise further this
year, before falling back through 2012 into 2013 as the impact
of external price pressures and the increase in VAT dissipates
and some downward pressure from a margin of spare capacity in
our economy persists. Even so, CPI inflation is likely to remain
above the 2% target for much of the next two years.
The economic recovery in the UK remains fragile;
in particular, the continuing squeeze on households' purchasing
power means there is a risk that consumer spending may weaken
further. Given the fragility of the recovery there are merits
to keeping Bank Rate on hold or even increasing the scale of asset
purchases further. Maintaining the current stance of policy for
longer (or moving to a more expansionary policy) would help to
stimulate a stronger recovery and so reduce the risk of inflation
falling below target in the medium-term. But I am also worried
about the upside risks to inflation. CPI inflation has been above
target for much of the past five years. There is a risk that this
sustained period of above-target inflation will lead to further
upward pressure on prices, either because some households and
businesses come to expect elevated inflation to persist or if
the squeeze on households' real incomes leads to higher pay growth.
In addition, there is a risk that continued strong global growth,
especially in emerging economies, may increase the upward pressure
on import prices, particularly those of commodities. My judgement
at the June MPC meeting was that these risks would have been best
balanced by a small increase in Bank rate to 0.75%.
The extraordinarily low level of Bank Rate means
that interest rates will have to rise at some point, but when
and by how much is impossible to say. How the economy will evolve
and thus how policy will need to respond cannot be known with
any certainty. All we can do as policymakers is to remain open
minded and to challenge our view of the economic outlook and of
the appropriate stance of monetary policy each and every month.
I will continue to approach my task on the MPC with considerable
pragmatism, recognising the imperfect knowledge and understanding
we have about both the state of the economy and the way it which
Since February 2010, I have delivered four on-the-record
speeches, given three interviews to national media, and made numerous
off-the-record presentations to a variety of audiences. These
included background briefings for market economists and economic
journalists on the asset purchase programme. I have made six regional
visits which involved various meetings and events with local businesses
and media. As the Bank's Chief Economist, I have extensive liaison
with economists in the private and official sectors, both in the
UK and internationally.