The Bank of England's Paul Tucker has suddenly taken a turn for the hawkish, warning that the central bank "cannot provide stimulus without limit, without a wary eye to inflation expectations."
Giving his last scheduled speech speech as deputy governor for financial stability (he leaves for the Harvard Kennedy School and Harvard Business School in about a month - so there could be a couple more), Tucker warned that the Bank's credibility could be undermined by excessive monetary easing.
The Monetary Policy Committee has needed to provide monetary stimulus not only to contain the short-term economic weakness but, even more important, to reduce its longer-run costs – social and economic. But we cannot do that at the expense of price stability – or, more technically, of allowing medium-term inflation expectations to drift away from the target of 2%. Were the anchor to slip, our ability to support recovery would be undermined.
It is sometimes suggested that independent central bankers are more averse to inflation than to periods of low growth and increased unemployment. I hope the past few years have demonstrated that, in fact, it is the credibility of the Bank of England’s commitment to price stability that enabled us to provide such exceptional monetary support to help the recovery. It is unimaginable that, prior to Bank independence in 1997, any government would have been able to hold the policy rate at effectively zero and make a further monetary injection of £375bn without inflationary expectations – and government financing costs – spiralling out of control.