BoE deputy governor and MPC member Paul Tucker confirmed today that he is at the hawkish end of the no-change camp on the committee. Giving testimony to the Treasury Committee, Mr Tucker said he did not want the impression to be taken that the MPC was drifting uniformly in the direction of increasing the amount of stimulus. He said the threshold for further policy loosening for him would be high because he remained concerned about credibility in the face of persistently high inflation. He said the MPC should start removing stimulus once the economy had reached “escape velocity”, by which he meant when solid growth had been established. Moreover, he said that if weak growth persisted it was likely that the economy’s supply capacity would be eroded, which itself would be inflationary.
Mr Tucker speaks relatively infrequently on monetary policy and his comments today provide helpful clarification of his position. They do, however, place him where we thought he was on the policy spectrum, namely with an inclination to tighten policy to reduce risks to the MPC’s credibility, but reluctant to do so at present given the weakness of demand.
Other notable messages from the Treasury Committee hearing were:
- Both Governor King and David Miles, who are more towards the dovish end of the committee, said they thought the risk to the household sector from higher mortgage rates was often exaggerated. Both said they expected mortgage spreads to compress as the policy rate rose, and Mr Miles said that most mortgage holders had operated in the past with interest rates at very much higher levels than they were now.
- Several different perspectives on inflation expectations were set out. Mr Miles said that, although near-term inflation expectations had risen, the evidence at longer horizons was more mixed and he was not yet convinced there was a material problem. Governor King said inflation expectations were likely to be correlated with GDP growth and so were only likely to pick up when the economy strengthened. Adam Posen said he paid more attention to professional forecasters and financial markets than to surveys of general public inflation expectations and that there was no indication that those agents were questioning the MPC’s determination to reduce inflation.
- Mr Posen reiterated that he thought the BIS’s assessment of the policy outlook was “nonsense” (in its annual report the BIS said global monetary policy was probably too loose, and raised a particular question over the UK policy stance). Mr Tucker, by contrast, said he did not believe the BIS analysis should just be cast aside.
- Mr Miles said that in his discussions with small and medium sized companies, whereas 12 months ago their major concern was access to bank finance now high input costs were top of the list.
Overall, today’s comments added colour to views that were already known but did not reveal any startlingly new insights. We continue to believe that the next policy move is more likely to be a tightening than a loosening, but that the latter will occur only when there is more convincing evidence that the recovery is in train.
BARCLAYS CAPITAL
ECONOMICS RESEARCH | INSTANT INSIGHTS