Written on January 23, 2011
Bank of England policy maker Adam Posen dismissed the recent burst of inflation as temporary, indicating he may keep pushing for more stimulus to aid the economic recovery.
“In terms of underlying U.K. inflation, driven by domestic forces, my position is unchanged,” Posen said in an interview in his office in London today. “Inflation will be well below” the bank’s 2 percent target, he said, citing spare capacity and the likelihood that budget cuts will hurt consumer spending.
Posen’s first public comments this year on the U.K. economic outlook suggest that he is continuing his call for the central bank to expand its bond-purchase plan, even after inflation reached an eight-month high of 3.7 percent in December. Nevertheless, he said the resilience of the euro against the pound and Germany’s economic growth may fan inflation in the U.K.
“What has changed for me is increasing awareness of the risks external to the U.K.,” Posen said. “There could be sufficient growth in demand abroad — positive surprises abroad, particularly in the euro area, our major trading partner — that could influence not just demand for U.K. goods and services, but also the exchange rate.”
“I don’t think it’s large enough to offset the domestic factors,” he said. “It’s something I’m definitely watching.”
The pound pared its gain against the dollar after Posen’s remarks, slipping 0.2 percent. It was at $1.5963 as of 3:18 p.m. in London, up 0.4 percent on the day. Bonds pared their decline, with the yield on the 10-year gilt up 0.1 basis point at 3.70 percent.
U.K. inflation accelerated more than economists forecast last month, moving further above the government’s 3 percent upper limit. Posen, who wrote a book on inflation targeting with Federal Reserve Chairman Ben S. Bernanke, attributed the increase to “one-time shocks” of the pound’s weakness, energy prices and the government’s sales-tax increase.
“Underlying wage growth has been nil,” Posen said, adding that unit labor costs have been declining, unemployment “flat or going up,” while net trade remains “negative.”
Posen, 44, voted to increase the Bank of England’s 200 billion-pound ($320 billion) bond-purchase plan by 50 billion pounds in October, November and December, the only member of the Monetary Policy Committee to do so. His colleague Andrew Sentance has voted since June to increase the benchmark interest rate. Minutes of the bank’s Jan. 13 meeting will be published on Jan. 26.
Concerns about the effects of faster inflation prompted economists at BNP Paribas SA, Citigroup Inc. and Societe Generale SA to say this month that the bank may raise interest rates faster than previously thought. The implied yield on 90- day short-sterling futures expiring in December climbed 37 basis points this month to 1.62 percent, as investors added to bets the Bank of England will raise its benchmark rate this year.
“Just because the markets price in a rate increase or a rate cut at any time doesn’t necessarily mean it will occur,” Posen said. “If the markets make a move and it lasts for a while, it has an impact on the economy and we take that into account in the forecast,” he said, adding “short-term movements in the gilt market do not always predict what actually comes out of the MPC.”
The central bank will publish new inflation and growth forecasts next month.
Posen said he has been “surprised in magnitude” by how Germany and some of its neighbors have weathered the debt crisis in the continent’s periphery. German business confidence unexpectedly rose to a record in January, data today showed.
“The pessimism over euro-zone prospects is probably exaggerated,” said Posen. “We have to consider the potential inflation risk to the U.K. were the euro-zone performance and currency to move up sustainably from where it is now.”
He also said recent data from the U.K. housing market made him more concerned about downside risks to home prices.
The difficulty many first-time buyers face getting credit and “very low” transaction volumes “are things saying ‘I am much more worried about a downside risk to the housing market from here than any further appreciation,’” he said.
Posen joined the Bank of England in September 2009. He was previously deputy director of the Washington-based Peterson Institute for International Economics, where he remains a senior fellow.