MPC's Posen: Raising Rates would be a "nonsense"

HAMISH_MCTAVISH

(Reuters) - The Bank of England has no reason to raise interest rates, as credit and wage growth are slow and there is little risk of a repeat of 1970s-style stagflation, policymaker Adam Posen said on Monday.

Posen, the most dovish member of the Bank's 9-member rate-setting committee, also said public inflation expectations remained stable. Oil prices and productivity growth -- two other past triggers of stagnant growth twinned with high inflation -- were not yet a cause for concern either.

As a result, Posen dismissed a call on Sunday for higher interest rates from the Basel-based Bank for International Settlements, a forum for central bankers.

"BIS just said all central banks should raise rates, and pointed to the UK's above-target past inflation. Nonsense," he wrote in slides provided by the Bank to accompany a closed-door presentation at the University of Aberdeen.

"In the UK and the west more broadly, there is little or no credit growth, little wage growth beyond productivity, little evidence of rising inflation expectations, and oil prices are not -- yet -- a one way bet," he said.

The Bank has kept rates at a record low 0.5 percent since the depths of the financial crisis in March 2009, despite inflation at a two-and-a-half year high of 4.5 percent, blaming above-target inflation on a series of one-off factors.

Posen -- who has voted for more quantitative easing since October -- said oil prices were his biggest source of inflationary concern, although they mattered less for the British economy than it did 30 years ago.

The cost of a barrel of Brent crude almost doubled in dollar terms between May 2010 and April 2011, but have since fallen by more than 15 percent.

"If the (upward) trend is big enough and reversals short enough, we will respond to keep inflation in line with the target. But a majority of the MPC -- and I agree -- says (we are) not yet there," Posen wrote.

He was less concerned about a possible slowdown in Britain's long-term rate of economic growth, which if true would limit how fast the economy could grow without generating excess inflation.

Two of Posen's fellow policymakers -- Spencer Dale and Martin Weale -- cited weak productivity growth as a reason behind their vote this month for higher interest rates.

Posen agreed that the numbers looked bad at first glance, but doubted they were correct, citing continued hiring at firms with low profit margins and a fairly small increase in company liquidations and long-term joblessness among other factors.

"We should continue to treat trend growth as largely unchanged," he said. "GDP data tends to get revised up after recessions -- particularly in the UK -- and there is an obvious candidate in net export measures," he said.

The Office for National Statistics releases revised first-quarter GDP data at 9:30 a.m. on Tuesday, which economists polled by Reuters expect to confirm the tepid 0.5 percent quarterly growth reported earlier.

http://uk.reuters.com/article/2011/06/27/uk-boes-posen-idUKTRE75Q4T720110627

Spot on.

RenovationMan

Sounds like he knows what he is on about. Hopefully we will see rates within the 0.5% to 3% range for many years to come.

doire_2

Just another BOE member who wants to be in the media spotlight. So not worth bothering with.

Opps my mistake...that argument is only for those BOE members who wanted a rise in IR

RenovationMan

doire wrote: »

Just another BOE member who wants to be in the media spotlight. So not worth bothering with.

Opps my mistake...that argument is only for those BOE members who wanted a rise in IR

Don't worry, everyone makes mistakes. That's why pencils have erasers.

Wookster

HAMISH_MCTAVISH wrote: »

Spot on.

hmmm lets see... who to trust, the BIS or Adam Posen?

Tough call

pqrdef

They daren't anyway - flood of repossessions, house prices plummet, banks' mortgage books go bad etc etc. Just a question of finding the excuses. Doesn't look good to be over a barrel.

System

Looks like this BIS announcement is an annual event.

http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/7859800/BIS-plays-with-fire-demands-double-barrelled-monetary-and-fiscal-tightening.html

RenovationMan

Joeskeppi wrote: »

Looks like this BIS announcement is an annual event.

http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/7859800/BIS-plays-with-fire-demands-double-barrelled-monetary-and-fiscal-tightening.html

I loved this bit that states what may happen if the BIS is right:

"There are limits to how long monetary policy can remain expansionary. Keeping interest rates near zero for too long, with abundant liquidity, leads to distortions and creates risks for financial stability."

Compared to what may happen if the BIS is wrong:

"If wrong, the BIS strategy risks pushing the global economy into depression"

Hmnnn 'risk of financial instabiity' Vs 'Depression'. Tough call!

abaxas

RenovationMan wrote: »

I loved this bit that states what may happen if the BIS is right:

"There are limits to how long monetary policy can remain expansionary. Keeping interest rates near zero for too long, with abundant liquidity, leads to distortions and creates risks for financial stability."

Compared to what may happen if the BIS is wrong:

"If wrong, the BIS strategy risks pushing the global economy into depression"

Hmnnn 'risk of financial instabiity' Vs 'Depression'. Tough call!

Screwed if we do, screwed if we dont.

Thanks Sarah Benny/ Krusty

RenovationMan

abaxas wrote: »

Screwed if we do, screwed if we dont.

Thanks Sarah Benny/ Krusty

Kinda makes the BoE 'wait and see'/'do no harm' approach look like the lesser of evils right now.

abaxas

RenovationMan wrote: »

Kinda makes the BoE 'wait and see'/'do no harm' approach look like the lesser of evils right now.

My view would be for a small increase. As this could placate all sides and cause little or no damage to the economy.