LONDON — The Bank of England faces a policy dilemma that is starting to split its Monetary Policy Committee.
Light was shed on the issues on Tuesday when the most dovish and most hawkish members of its Monetary Policy Committee spoke to the press in virtually simultaneous interviews, and expressed diametrically opposed views.
Vlieghe is a dove. Doves are typically members who often want more monetary easing from the central bank. They’re usually the first in favour of interest rate cuts and more positive about the beneficial potential of quantitative easing (QE).
Those views were very clearly on show in the interview, with Vlieghe saying that the current economic environment is one “where a premature hike would be a bigger mistake than one that turns out to be slightly late.”
“I haven’t really changed my mind,” he said. “I think the consumption slowdown is here, it’s not over. I don’t think there’s going to be a sufficient offset from investment and net exports to compensate for that,” he told The Independent’s Ben Chu.
“Of course if the data turns out stronger I do agree that a higher rate is warranted but my central forecast is that’s not going to happen in the near term.”
Doves have largely dominated the MPC since the financial crisis, and particularly since the referendum last June. However, with inflation surging to its highest level since 2013 — 2.9% at the last reading — the hawks on the MPC are starting to resurface, as evidenced by the three members of the committee who voted for a hike in June.
Generally speaking, hawks are more sceptical of QE and typically favour higher interest rates and often express concerns about financial instability caused by easy money.
Chief among the hawks at the Bank of England right now is Ian McCafferty, who has taken on the mantle of biggest hawk since the departure of Kristin Forbes at the end of June.
“We made the last interest rate cut from 0.5% to 0.25% last August after the EU referendum decision when it was felt that a stimulus was needed,” he told the paper.
“Since then the economy has not slowed to the extent we feared it would last summer and meanwhile inflation has been high.
“I feel on the balance of monetary policy that there is a need for change. I think this would be justified and would be the prudent thing to do at this stage.”
The comments of these two members of the MPC almost perfectly sum up the issue facing the bank right now.
At its simplest level, the policy dilemma facing Britain’s central bank is that it must balance surging inflation brought on by the weakened pound since the referendum, with the slowdown in the economy, dwindling consumer spending and declining inward investment.
Inflation currently sits at 2.9%, well above the 2% target mandated by the government, while GDP growth in the first quarter of 2017 was just 0.2%.
The likes of Vlieghe are willing to look beyond that inflation, believing it to be a temporary consequence of the falling pound since the referendum, while McCafferty and his fellow hawks see it as a bigger issue and seek to quash any further rise in the price of goods and services by increasing rates.
The MPC is set to meet in just under a month for its August meeting, with some banking analysts forecasting that a rate hike could come at that vote. However, with most MPC members seemingly stuck in their ways for the time being a rate hike is unlikely to be on the cards come August 3.
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