Policymakers must resist “dangerous” calls to shift their focus away from keeping inflation under control in a bid to stimulate growth, the Bank of England’s chief economist has warned.
Spencer Dale, who is also the Bank’s executive director of monetary policy, said inflation targeting “is not a sham”, although he admitted that efforts to prevent an even deeper recession mean growth in consumer prices will remain above target in coming years.
The Bank’s monetary policy committee (MPC) is tasked with keeping inflation at 2 per cent, but latest figures show prices rose at an annual rate of 2.7 per cent in January. The MPC forecasts that inflation will average close to 3 per cent during the ten years to 2015.
In a speech to the Asian and Chinese business associations at the London Chamber of Commerce, Dale said there were “worrying” signs of a recent move away from the accepted wisdom that low and stable inflation was necessary for economic prosperity.
“A sense that inflation is somehow yesterday’s war,” he said. “That central banks should focus more on growth. That a period of higher inflation may even aid the recovery. This is dangerous talk.”
Such a stance potentially puts Dale at odds with Mark Carney, the incoming Bank of England governor, who told MPs last month that he believed there was “merit” in debating the MPC’s framework and “full monetary stimulus” is needed to help the economy.
The Bank’s attempts to encourage growth by embarking on a quantitative easing (QE) – or money printing – programme have been blamed for pushing up prices and reducing the yields on government bonds, hitting pensioners’ incomes.
Dale has been the most reluctant member of the MPC to embrace more QE. He was one of only two on the committee to vote against increasing the asset purchase target to £375 billion in July last year, and last month he voted with the majority in opposing another round of bond buying.
Sir Mervyn King, who retires as Bank governor in July, had wanted to expand the QE programme by £25bn.
Minutes of the MPC’s most recent meeting will be published on Wednesday – the same day Chancellor George Osborne delivers his Budget. Osborne may use the event to tweak the wording of the MPC’s remit that prioritises price stability over growth and employment, but economists have warned that such a move could raise the risk of even higher inflation.
In his speech yesterday, Dale said there was a consensus that the best contribution monetary policy can make to the long-term health of the economy is to deliver stable prices.
He added: “That consensus is based on painful experience that monetary policy can’t affect the level of output in the long run. That we can’t generate permanently higher output and permanently higher employment simply by printing more money.
“We should be nervous about how quickly we overturn that consensus.”
Simon Hayes, chief UK economist at Barclays, said: “Dale’s comments serve as a reminder that not everybody is convinced that more QE is the solution to the UK’s economic problems.
“However, with the economy perched on the edge of a triple-dip recession, his admonition may fall on deaf ears.”