BANK of England chief economist Spencer Dale yesterday warned that the UK faces a “long and painful” recovery as wages grow more slowly than prices, and admitted there is little the monetary policy committee (MPC) can do to help.
A combination of rising raw material costs, a weak pound and higher university tuition fees and VAT has kept inflation above 2 per cent since December 2009 and it is expected to remain so until the second half of 2014.
Mark Carney – who is due to take over from Sir Mervyn King as Bank governor next year – suggested on Tuesday that central banks should consider scrapping inflation targets if growth does not pick up, although he insisted his comments did not signal a change of policy under his leadership.
Dale admitted that the MPC could have pursued a tighter monetary policy, raising interest rates in a bid to keep inflation in check, but said that would have risked an even-deeper recession and higher unemployment.
He added: “The MPC can try to pick the least costly route, but ultimately it can’t avoid the journey being long and painful”.
In an attempt to boost growth, the Bank embarked on a programme of quantitative easing (QE), buying £375 billion of UK government debt to inject money into the economy. Having done so, it amassed £35bn of interest in its asset purchase facility and last month that cash was transferred to the Treasury to reduce the budget deficit.
Dale dismissed concerns that the move had weakened the MPC’s grip on monetary policy, although he accepted that the effect of the transfer was similar to extending QE by £35bn, as both actions “reduce the amount of government debt held by the private sector and so boost – at least initially – the amount of broad money in circulation”.
The transfers to the Treasury, which could run at about £10bn a year, could be reversed when the Bank starts raising interest rates and selling bonds, and Dale said this will place the relationship between the two under increased scrutiny. He added: “The ‘knowledge’ of cabbies as they navigate the streets of London far exceeds our understanding of the economy and how it’s likely to evolve.”