Bank of England policy maker David Miles said officials must not withdraw stimulus too soon, signalling that they may have to ignore an inflation rate that still exceeds the government's 3 per cent limit.
The bank faces the "risk of tightening monetary policy too soon," Mr Miles said in a speech in Dublin today. This risk "is one that I would consider small if it were clear that the economy was on a typical upswing of the sort of cycle we used to think normal. But I do not see many of the signs that are usual in a normal upswing."
Mr Miles spoke as reports today highlighted the dilemma facing the bank's nine-member Monetary Policy Committee, which is split on whether to pay more attention to inflation or the threat of a new recession. Consumer prices rose 3.1 per cent last month from a year earlier, exceeding the limit for a seventh month, while separate data showed exports dropped in August.
Adam Posen says more stimulus is needed to boost economic growth, while Andrew Sentance has advocated higher rates. While Mr Miles said quantitative easing remains a "powerful tool" that "we may come to
use," he didn't say how he voted this month. Minutes of that meeting are due on October 20th.
The outlook may force the Bank of England to keep rates at a record low for the next two years, said Philip Green, the billionaire owner of Arcadia Group.
"The worst hopefully is behind," the retail magnate said in an interview with Bloomberg Television late yesterday in London. "Do I think there's still some stormy seas? Yes," he said, predicting that U.K. interest rates "don't go far for the next 18 months, two years."
Mr Miles said he's "not blase" about the fact that another increase in value-added tax will keep
inflation above the central bank's 2 per cent goal next year.
"UK inflation now sits uncomfortably above the target," Mr Miles said. "But I believe that this tells us rather little about the cyclical position of the economy or where inflation will be in the future."
He conceded there's a risk that the Bank of England will leave policy too loose for too long and that hindsight will prove its stance to be the wrong one.
"If growth and inflation look stronger than I now think is the most likely outcome it will be the 'MPC completely failed to see what was obvious to nearly everyone - that inflation was out of control," said Mr Miles. "But the only sensible thing to do is to look at all the evidence we have today, and balance the risks."
The UK economy "slowed considerably" in the third quarter, adding to the case for the Bank of England to expand stimulus to prevent a renewed recession, the British Chambers of Commerce said today.
Bloomberg