Tucker resignation makes room for bank policy shift

Paul Tucker has set no leaving date but reports indicate an autumn departure. Picture: Getty Images
Paul Tucker has set no leaving date but reports indicate an autumn departure. Picture: Getty Images
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Bank of England deputy governor Paul Tucker resigned yesterday removing an obstacle to further money printing.

The Bank did not give a date for Tucker’s departure, but it is likely to be in the autumn after he has helped new governor Mark Carney establish himself in the post.

There had been speculation that Tucker would leave after after he lost the leadership race to Carney, who had demonstrated a willingness to provide strong fiscal stimulus while governor at the Bank of Canada.

Tucker, on the other hand, is one of the policymakers who have consistently voted down outgoing boss Sir Mervyn King’s attempts to step up bond purchases in recent months.

His departure gives Carney a chance to reshape the upper echelons of the Bank. Another deputy governor who has opposed the latest call for stimulus, Charlie Bean, is due to leave at the end of June next year.

Analysts have suggested that, as incoming governor, Carney will be able to persuade the doubters on the monetary policy committee (MPC) to join him if he wants to increase quantitative easing (QE) when he takes office in July.

But MPC member Ian McCafferty yesterday signalled that he will not be swayed easily, with a speech asserting the Bank has not become more tolerant of inflation.

Although he admitted that the rate is likely to remain above the Bank’s 2 per cent target “until at least the end of next year”, the former chief economic adviser to the CBI referenced the rampant price rises of the 1970s and warned “there is a risk that the low and stable inflation of the past two decades is now being taken for granted”.

McCafferty said that the recent combination of above-target inflation and depressed economic activity “is possibly the worst such trade-off faced by the MPC in its 15-year history”.

He added: “Greater sensitivity to short-term inflation news could suggest that expectations are becoming less anchored than they have been, and that markets perceive that the MPC has become more tolerant of inflation.

“This is certainly not the case, though it would be easy to see why some might think so, given the recent history – inflation having overshot the target for the past three years and not expected to return to target for much of the next two.”

Simon Hayes, an economist at Barclays, said there was a widespread expectation among investors that the MPC will expand QE once Carney takes office, but McCafferty’s comments highlighted the extent to which some members feel the Bank is already “testing its credibility to the limit”.

“In our view, the arrival of Mark Carney is not in itself a guarantee that the MPC will embark on another QE expansion,” he said.

But he added that Chancellor George Osborne had already revealed a preference for “monetary activists” when he hired Carney and may now use his power to appoint a new deputy governor to add a dove to the nine-member MPC.

The pro-QE camp has also been strengthened by a recent easing in consumer price inflation, although economists fear it could start rising again soon.