–Adds Detail, Quotes, Recasts Version Transmitted At 1202 GMT
–Tucker: Worried About Damage To UK Supply Capacity From Weak Growth
–Tucker: MPC Must Ensure People Don’t Lose Faith In It
LONDON (MNI) – Bank of England Deputy Governor Paul Tucker said
the call from the Bank for International Settlements for higher interest
rates should not be dismissed, and he said that for him the threshold
for more quantitative easing was high.
In evidence to the Treasury Select Committee Tucker said he did not
want people to come away with the impression the MPC was drifting
towards more stimulus and he said it was vital people did not
lose faith in the BOE Monetary Policy Committee’s commitment to hitting
its 2.0% inflation target.
Asked about the BIS’ call for higher interest rates Tucker said
“Well, I certainly don’t think it should just be cast aside.”
Tucker was asked to give evidence towards the end of the Treasury
Select Committee hearing.
He noted one member of the TSC had earlier asked about inflation
running at between 4 and 5%.
“This (high inflation) is distinctly uncomfortable, and, in fact,
I have been thinking about chipping in because I am concerned that
you, and the people listening, could gain the impression that this
is a committee which is uniformly drifting in the direction of
thinking more stimulus may be needed,” Tucker said.
“Now more stimulus may be needed. Bad things can happen and if bad
things happen that don’t threaten an upward drift in inflation then
maybe we will have to provide further stimulus,” he added
“But the threshold, for me, for that would be high,” Tucker said.
While BOE Executive Director Markets Paul Fisher has raised the
possibility of more QE, Tucker instead talked about the risk of high
inflation outturns undermining the MPC’s credibility.
“I am one of those who, from the back end of last year, has worried
about the possibility of an upward drift in inflation expectations,” he
said.
“I share the balance of the comments made by my colleagues that, so
far, those risks haven’t crystallized – although the evidence is mixed,”
he added.
“But the longer inflation remains so high the more likely it is
that when we say ‘Oh, it’s a one-off factor, it’s another one-off
factor, people in this country will think ‘They use the sentence
it’s a one-off factor and a one-off event in a completely different way
from anyone normal,” he said.
Tucker also highlighted the concern that weaker-than-expected
growth would erode the UK’s supply capacity – and he said he had only
wanted to hike Bank Rate when growth was strong enough to absorb spare
capacity.
The recent high inflation and soft growth outturns, however, had
made policy making “peculiarly difficult”, Tucker said.
“The economy has turned out softer this year than I would have
expected. My own position has been that we should start to withdraw the
monetary stimulus once we have securely achieved what I call escape
velocity – growing at a pace that absorbs the slack in the economy,”
Tucker said.
“The economy has been mostly weaker-than-expected and that
(achieving escape velocity) hasn’t happened,” he added.
“We now face another risk though. The longer the weakness persists,
the more likely it is that the supply capacity of the economy will get
eroded – which in plainer terms means that long term unemployment
increases … investment remains weak and capital gets scrapped,” he
said.
“We could find ourselves in circumstances where the upward
pressures on inflation don’t come from strong growth but come from an
erosion of supply and it is for that reason … I do think that it is a
peculiarly difficult moment to make policy,” he added.
“The transmission mechanism of our instruments is more complicated
than usual but I don’t think that is the big thing. The big thing is
that the forces buffeting this economy are frankly are all over the
place, making it very difficult to predict what is going on,” Tucker
said.
“The only thing that we must remain absolutely determined about in
those circumstances is people don’t lose faith in us and our
determination to keep inflation coming down,” Tucker said.
“We are not happy with inflation that has been so much higher than
our target, of course we are not.”
“This has made life much more difficult for the country and much
more difficult for us in undermining our credibility.”
On the question of extending quantitative easing, Tucker said the
MPC is not a committee “drifting towards thinking that more stimulus may
be needed” adding “the threshold for me (for increased stimulus) is
high.”
–London newsroom: 4420 7862 7491; email: drobinson@marketnews.com
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