Top economist against rise in interest rates

Bank of England policymaker Adam Posen yesterday dismissed short-term fluctuations of the inflation rate as irrelevant and repeated his call for more money to be pumped into the economy.

Mr Posen, an external member of the Bank’s Monetary Policy Committee (MPC), said those urging for a rise in interest rates now were “playing the wrong game” and would miss the Bank’s inflation target.

“Setting monetary policy in response to short-term commodity price gyrations would only destabilise the UK economy and create greater uncertainty about future inflation,” Mr Posen wrote in a guest column for the Financial Times.

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The column made clear that Mr Posen was expressing his own views.

Mr Posen, who has called for a £50bn expansion to the BoE’s programme of quantitative easing, said the economy had performed “pretty much as I expected” and he restated his prediction that consumer price inflation will have fallen below the two per cent target in mid-2012.

“The majority of the MPC is right to have held its nerve against calls for rate hikes,” Mr Posen said.

“The fiscal contraction and household deleveraging will continue, and wages will grow more slowly than productivity. Headline CPI inflation will decline towards the target.”

Mr Posen said raising interest rates to offset VAT increases would be counter-productive

“Tightening fiscal policy with no offset from additional monetary easing will strengthen the underlying disinflationary pressures, as in Japan in 1997, when VAT was raised without a monetary response,” he wrote.

Mr Posen joined the MPC in September 2009.

He is a senior fellow at the Peterson Institute for International Economics, which he joined in 1997. His research focuses on macroeconomic policy and performance, the European and Japanese political economies, central banking issues, and the resolution of financial crises.

He was previously a visiting scholar at central banks including the Federal Reserve Board, the European Central Bank, and the Deutsche Bundesbank.

He has also been a consultant on economic and foreign policy issues to several US government agencies, the Japanese Ministry of Economy, Trade, and Industry, the UK Cabinet Office, and the IMF.

He is in his second two-year term as a member of the panel of economic advisers to the US Congressional Budget Office.