Ben Broadbent, who is to replace Andrew Sentance on the MPC at the end of this month, today gave testimony to the Treasury Select Committee. Mr Broadbent explicitly said he did not intend to give a clear indication of his views on the appropriate monetary policy setting, saying he thought it would be inappropriate given that he had not yet taken up his position. However, he did rule out more QE, and, in our view, his testimony appeared to downplay the need for immediate policy tightening.
Mr Broadbent was quizzed on how worried he was about the persisted above-target rates of inflation. He said the MPC’s main forecast error had been to underestimate commodity price inflation, and the BoE may have to improve its methods for doing that. However, he expected inflation to fall next year, broadly along the lines of the MPC’s forecast. He said it was important for policymakers to monitor a range of indicators of inflation expectations, but that he saw no strong evidence that expectations had become de-anchored from target. This, he said, had been surprising. Mr Broadbent initially argued that because of lags in the transmission of monetary policy the policy decisions he made over the next few months would not affect inflation until 2013. From that perspective the current high rates of inflation were of little relevance. However, when pressed by the Committee Mr Broadbent conceded that the MPC’s current decisions may affect inflation expectations.
In his written testimony, Mr Broadbent noted three main risks to the economy: a sudden rise in household saving; higher commodity prices (which would squeeze real purchasing power); and higher bank funding costs from financial market stresses. It is noteworthy that all of these risks are to the downside. He said the effect of QE on the economy was “hard to gauge”, although he said it was “hard to imagine there’s been no impact”. He said he did not believe there was a case for more QE now, however.
When he was appointed there was a general view that Mr Broadbent would be towards the hawkish end of the committee even if he was not a like-for-like replacement for Mr Sentance. However, his testimony today, which emphasised downside risks to activity, a lack of concern about inflation expectations and confidence that inflation will fall back towards target, suggests he may not be supportive of early policy tightening.
Simon Hayes, BARCLAYS CAPITAL – Foreign Exchange Research