Bank official warns against tighter policy
PUSHING hard to cut inflation may do more harm than good, the Bank of England’s David Miles said yesterday, claiming that tighter monetary policy would hit incomes in the long run.
Although the Monetary Policy Committee (MPC) is officially meant to keep consumer price inflation close to two per cent per year, Miles argued that reducing demand to lower inflation risks inflicting further damage on the economy’s potential.
Miles was the only member of the MPC to call for more QE in this month’s meeting, and pointed to the UK’s ongoing economic weakness as the reason, despite inflation still standing at three per cent.
GDP remains four per cent below its pre-crash peak and labour productivity has fallen since the financial crisis, which Miles fears making worse through tighter policies.
“Faster GDP growth is likely to increase the speed of the recovery of labour productivity,” he told the society of business economists.
Furthermore, “stronger labour productivity would pull down unit labour costs unless it is fully matched by higher wages. This means that stimulating GDP growth with monetary policy does not have to lead to strong inflationary pressures.”
In a note, Barclays Capital commented on the Bank official’s speech: “The justification for Miles’ policy decision is interesting in our view, as for the first time an MPC member is arguing this strongly about the welfare effects of bringing inflation down quickly, when the economy is weak,” BarCap said.