Stagflation fears wide of mark, says MPC newcomer McCafferty

Ian McCafferty, the newest member of the Monetary Policy Committee, hit back at commentators who have voiced concerns that the weakening pound could lead to rising costs, which will hurt British businesses and households.

Mr McCafferty told the Yorkshire Post: “The word ‘stagflation’ is difficult. I’m old enough to remember the 1970s and stagflation in those days was a different proposition from that which we face at the moment in the sense that, yes, we have very little growth... but inflation is still running at only 2.7 per cent.

“This is a long way from the sort of stagflation where you had double-digit inflation and a significantly falling economy in the 1970s.

“We shouldn’t be using some of these terms unwisely.

“I do recognise that the economy is struggling to move into recovery and that we at the Bank of England are standing ready, using our available policy instruments, to try and do all we can to support that move back into recovery.”

Mr McCafferty said he would be worried “if (the pound) were to go lower very rapidly, because the inflationary consequences of that would be damaging for the economy”.

He said the MPC still sees quantitative easing (QE) as an effective tool of monetary policy, but stopped short of calling for an increase to the £375bn asset purchase programme. He added that QE’s effectiveness is partly dependent “on the state of people’s mind at the time it’s delivered and thereafter” and will not have as much impact when companies and consumers are avoiding risk in their spending.

Mr McCafferty said the existing programme would further stimulate the economy if confidence improves.

He added that it was too early to say whether the programme would ultimately result in a profit or loss for the central bank.

Asked about the health of Britain’s banks, Mr McCafferty said lending conditions are improving, “which would be an indicator that the health generally is starting to improve”.

“But I don’t think one can be specific about the banking sector as one entity,” he added. “There are clearly banks in very different places across the spectrum in terms of those that need further capitalisation and those that are in a much better position.”

Mr McCafferty made the comments after a two-day trip to Yorkshire to visit companies in Doncaster, Sheffield, Rotherham and Leeds.

He said business leaders are reporting some signs of improvement in trading and two housebuilders he met are seeing improving conditions in the mortgage market.

Mr McCafferty said: “We now believe that the economy is set for a recovery over the course of the next year or so.

“It clearly is going to be a recovery that remains modest and slow to take-off rather than anything more dramatic... but at the same time I do think there are some underlying reasons as to why that recovery should now take place.

“The conversations I’ve had with individual businesses seem to back that up.”

He said the international backdrop is also improving.

“We are starting to see faster growth in the emerging markets,” he added. “It’s now looking more likely that the US can stage a sustainable recovery and some of its problems, particularly the structural adjustments in its housing market, seem to be close to completion.

“I think that, although the eurozone remains very much in the slow lane with the recession expected for much of 2013, some of the tail risks of break-up which were so damaging to business confidence in the UK over the last 12 months have started to recede.

“Overall, conditions for an improvement in confidence are starting to come through and that, combined with signs that we now think the Funding for Lending scheme is starting to thaw some of the lending markets, should mean that the economy starts to improve as we go through 2013.”

Mr McCafferty, formerly chief economic advisor to the Confederation of British Industry, said his experience has given him an understanding of business and an ability to “translate” how business leaders think and operate into the macroeconomic discussions of the MPC.

“I’m pinching a phrase, but bringing them the micro into the macro,” said Mr McCafferty, who joined the rate-setting committee in September. He said it was “far too early” to start discussing a rise in interest rates. “We have barely got into recovery mode, let’s not jump the gun,” he added.

He is due to meet the new Governor in the next couple of weeks.