Posen: ECB is on right track

CENTRAL banks have enhanced their future credibility and independence as a result of their policy decisions, including large-scale bond purchases, Bank of England Monetary Policy Committee (MPC) member Adam Posen said yesterday.

Speaking at the Barclays Capital annual Global Inflation-Linked Conference in New York, he said: “Always refusing to intervene in debt markets for appearance’s sake alone, regardless of the economic circumstances, is a sign of immaturity or insecurity, not independence.”

The European Central Bank (ECB) has come under fire recently for its sudden U-turn on bond purchases and its perceived capitulation to political pressure.

Posen said that the central bank will not suffer from a loss of credibility providing its decision was the right thing to do economically.

“When the instrument nominal interest rate is already at de facto zero bound, and the financial transmission mechanism is damaged, buying bonds is the only means central banks have of trying to deliver price stability against deflationary pressures – some form of quantitative or credit easing is the right thing to do,” he explained.

He criticised the financial markets’ and media response to the ECB decision as “awfully shallow”.

Comparing central bank behaviour to that of a promiscuous young person, he says that what matters for a central bank’s independence is its ability to say no and to mean it, and to be responsible about when it chooses to say yes. In the case of the Bank of England’s QE policy, it was initiated by the MPC in line with its price stability mandate.