LONDON (MNI) – Recent economic indicators have been “somewhat
comforting”, with the recovery in the UK and globally “remaining on
track”, but the outlook “remains highly uncertain”, Bank of England
Deputy Governor Charles Bean said on Monday.
In the text of a speech given at the Market News International
Annual Seminar here, Bean also said that inflation would likely remain
above the Monetary Policy Committee’s target of 2% “for a while yet”,
but would fall back to target beyond the end of next year.
“In the light of that outlook, I believe we have made appropriate
use of the ‘constrained discretion’ granted to us in the Chancellors
remit, looking through the temporarily elevated inflation to the medium
term in order to avoid unnecessary volatility in output.”
“Tightening policy sharply in order to deal with the currently
elevated level of inflation would simply have put a brake on the
recovery unnecessarily and would have made inflation more likely than
not to fall below the target in the medium term,” he added.
Bean noted that stock rebuilding contributed to about half of the
past year’s economic growth and warned that further contribution would
only be temporary.
“And the contribution of public spending to growth is also set to
fall as the Governments planned fiscal consolidation gets underway,”
Bean added.
“So economic prospects depend crucially on private final domestic
demand and net exports picking up the baton; fortunately there have been
signs that handover might be starting to take place in the latest
quarterly data,” the central banker added.
However, a recent survey carried out for the BOE suggested that
consumer sentiment could fall further in the near term, as households
make adjustments to prospective fiscal consolidation measures, Bean
said.
Bean also noted weakness in the UK’s net exports, especially in its
exports of financial services — “no doubt in part reflecting the impact
of the banking crisis.”
“Foreigners demand for UK financial services may plausibly
continue to be somewhat lower than before the crisis; so this weakness
may persist,” Bean warned.
Conversely, Bean was more optimistic regarding the market share of
goods exporters, due in large part to a more favourable exchange rate.
“So far, there is less sign that the lower level of sterling is
leading to the substitution of imports by domestically produced goods
and services,” Bean said. “But it is likely that the producers of
internationally tradable goods and services take time to respond to the
improved opportunities associated with a lower real exchange rate,
especially if investment in foreign distribution networks or the
repatriation of off-shored activities is required.”
“So, other things equal, it seems reasonable to expect the impact
of the lower level of sterling on net exports to continue to build
through next year,” he said.
Bean reiterated the MPC’s view that the current elevated level of
consumer price inflation “is likely to persist in the near term”, though
would prove temporary.
“The standard rate of VAT is set to rise again at the beginning of
next year; but once that drops out of the annual comparison a year
later, so the inflation rate is likely to fall back sharply,” Bean said.
“The impact on prices of sterlings past depreciation should be
starting to wane. And the relatively moderate expansion that we expect
over the next year or two should ensure that there is some, albeit
uncertain, brake on inflation from spare capacity,” he added.
Shifting his focus to outside of the UK, Bean commented on the
criticism lobbed at the U.S. Federal Reserve’s large-scale asset
purchase program, claiming that the program was inflationary and “an
attempt to engineer a beggar-my-neighbour devaluation”, which would
increase capital inflows and lead to asset bubbles.
“These criticisms seem to me mostly off the mark,” Bean said,
noting that the early stages of QE, both in the U.S. and the U.K. had
appeared to bring down longer-term yields “below where they would
otherwise have been.”
“This time around, the transmission channel has been rather
different, as after falling on the anticipation of further asset
purchases, longer-term US yields rose,” Bean said.
“But the policy should only prove inflationary in the medium to
long run if it results in excessive nominal spending growth, which
hardly appears likely at the current juncture,” he continued. “Only if
the Federal Reserve fails to tighten policy promptly as the recovery
takes hold is excessive inflation likely to be a problem.”
Bean conceded that the increase in capital inflows to emerging
economies due to stimulus measures in developed economies justified
imposing temporary restraints.
“But where such asset price pressures are building, they seem more
likely to be related to overly loose monetary and financial policies in
those countries and their unwillingness to allow exchange rates to bear
more of the strain,” Bean said.
Turning to the Eurozone, Bean noted the divergence between the core
economies, led by Germany, and the periphery, which continue to struggle
“in the face of significant fiscal and structural challenges.”
“While the countries of the euro-area periphery are each confronted
by specific challenges, they all need to restore their competitiveness
without the option of devaluation,” Bean said.
“Instead, in the absence of effective structural reform, they face
the prospect of sustained low growth in order to drive down wages and
prices. That itself makes the task of stabilising public debt harder.”
— London newsroom: 4420 7 862 7492; email: ukeditorial@marketnews.com
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