Sorry savers: More easing is still needed to support UK recovery

David Blanchflower
David Blanchflower is Bruce V Rauner professor of economics at Dartmouth College, and a former member of the Bank of England’s Monetary Policy Committee.

THE Monetary Policy Committee’s (MPC) minutes of its meeting on 20 February make some very interesting reading. They suggest that the Committee is ready to adopt a more flexible approach to policy-making. And of particular interest is that, for an unprecedented fifth time, governor of the Bank of England Sir Mervyn King voted in the minority with two other members – Paul Fisher and David Miles – for an additional £25bn of quantitative easing.

This is the second time King has been in the minority on making asset purchases; he was also in a minority of three in June 2012, when he voted with Miles and Adam Posen for an extra £50bn of quantitative easing. Further, King has voted against the majority three times over interest rate rises – which he voted in favour of twice in 2002 and once in 2007.

This wouldn’t happen in the United States, and I suspect it won’t happen in Britain for long, given that King retires in June and the other members will not want him left out on a limb. As such, I suspect that two or more will vote with him over the next few meetings. And this means that additional easing is coming, as it should, even before Capable Mark Carney, the Bank of England’s knight in shining armour, takes over in July.

Carney, the poor chap, had better deliver quickly, given the high expectations. If he doesn’t, the press will be all over him. But due to the parlous state of the British economy, it is hard to see that he will be able to do much, and the honeymoon will be over all too quickly. One thing we do know, however, is that he plans to loosen monetary policy even further. As he should.

These were very dovish minutes which, rightly in my view, gave extremely short shrift to misguided inflation hawks like Patrick Minford and Andrew Lilico, who have been pushing for interest rate increases. Their stance pays insufficient attention to the young, the unemployed and the poor, who have suffered most from Britain’s recession.

And the most telling sentences to emerge from the minutes, in my view, are these:

“Attempting to bring inflation back to target sooner, by removing the current policy stimulus more quickly than currently anticipated by financial markets, would risk derailing the recovery and undershooting the inflation target in the medium term. The Committee’s remit was to deliver price stability, but to do so in a way that avoided undesirable volatility in output.”

The stimulus must be kept going as growth disappoints – just look at the horrible retail sales numbers. The MPC’s fear is still of deflation, not inflation. Sorry savers, you did well from the house price boom, as well as the recent burst in the equity markets: the FTSE is up nearly 9 per cent this year already. Inflation is the least of our worries; raising rates would be a disaster right now. I suspect we won’t see a rate rise for five years at least. Thankfully, more monetary stimulus is on the way.

The hawks don’t know what they are talking about.

David Blanchflower is Bruce V Rauner professor of economics at Dartmouth College, and a former member of the Bank of England’s Monetary Policy Committee.

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