Time to pump more money into the economy, urges MPC member

Adam Posen, of the Bank of England's Monetary Policy Committee, told Yorkshire business leaders that high unemployment, rather than "sustained" high inflation, remained a threat to Britain's economy.

He believes there is a case for considering more monetary policy stimulus – or quantitative easing – to support economic recovery.

While his vote at the October MPC meeting was not a foregone conclusion, Mr Posen said he believed more stimulus was needed, raising the prospect of a three-way split or even a decision to restart quantitative easing next week.

"The case I wish to make is that monetary policy should continue to be aggressive about promoting recovery, and subject to further debate, I think further easing should be undertaken," Mr Posen said.

Like the majority of the MPC, Posen voted earlier this month to keep interest rates at a record low of 0.5 per cent and keep the stock of asset purchases with newly-created money, QE, at 200bn.

Andrew Sentance was the only MPC member who called for a quarter-point rate rise for the fourth month running.

Most analysts expect the Bank to leave policy unchanged well into next year.

However, the minutes of the September MPC meeting revealed that some members had thought the probability that easing would be needed had gone up.

In his speech, Mr Posen warned that policymakers faced a "clear and sustained uphill battle" in which monetary easing had a role to play, even if it may not deliver a sustained recovery on its own

He told the audience at the KC Stadium in Hull that persistent high unemployment and output gaps are a threat, and further monetary action should be taken to sustain and promote recovery.

In his speech, Mr Posen said there remained "a significant gap" between what the economy could be producing at full employment and what it currently produces.

Drawing on his research on Japan in the 1990s and the US and Europe in the 1930s, Mr Posen described the risks to the recovery "if errors were made by tightening policy prematurely or loosening policy insufficiently".

He said: "The risks that I believe we face now are...ones of sustained low growth turning into a self-fulfilling prophecy, and/or inducing a political reaction that could undermine our long-run stability and prosperity.

"Inaction by central banks could ratify decisions both by businesses to lastingly shrink the economy's productive capacity, and by investors to avoid risk and prefer cash."

He continued: "Economic recovery following a financial crisis is a long process dominated by the interaction of unemployed resources, dysfunctional banking systems, and the degree of policy stimulus.

"We are a long way from home, and a long, long way from overheating.

"The absence of any recent data inconsistent with this pattern in the UK or elsewhere in the West seems to me pretty conclusive.

"If there was going to be a recovery that either was inflationary or otherwise meaningfully different from that established pattern, it should have been evident by now."

When considering further monetary easing, Mr Posen said he supported further use of Government bond purchases.

He accepted that the impact of such purchases may have limitations and consideration of alternatives should continue.

But he added: "Fear of looking ineffective should not be a deterrent to doing the right thing. When facing a worsening situation, you work with the tools you have."

He explained that a "normal" recovery after the financial crisis was unlikely and the policy measures taken, although helpful, would prove insufficient.

But he said it was worth putting these expectations on hold to see whether the recovery following the stimulus provided in the UK and elsewhere was strong enough.

As that has not happened, he argued, there is now a case for considering "doing more" .