–BOE Posen: Monetary Policy Should Be Aggressive in Promoting Recovery
–BOE Posen: If Price Stability At Risk Medium Term It Is On Downside
–BOE Posen: We Are A Long, Long Way From Overheating
–BOE Posen: Don’t Take It For Granted He Will Vote For More QE in Oct
–BOE Posen: Comfortable With Extra QE Being Centred On Gilts At First

LONDON (MNI) – Bank of England Monetary Policy Committee member
Adam Posen is making the case for further policy easing, saying policy
should be “aggressive about promoting recovery.”

In the transcript of a speech issued Tuesday, Posen argues in
favour of yet more loosening of monetary policy, saying without it there
is a risk low growth becomes a self-fulfilling prophecy. He says,
however, the debate over further easing is still open, and it should not
be taken for granted he will vote for it at the October MPC meeting.

In the minutes of the September MPC meeting, unidentified members
argued that the likelihood further easing would be needed to stimulate
the economy had increased, and Posen’s speech makes clear he took this
view.

“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,” Posen says, in the text of
the speech to the Hull and Humber Chamber of Commerce.

Posen says, however, that he is open to fresh ideas on the subject
and “no one in the markets or the press should take my vote at next
week’s MPC meeting as a foregone conclusion.”

At the September meeting of the nine member MPC eight members voted
for no change in policy and one for a hike in Bank Rate.

“This is an open debate, at least for those with open minds,” Posen
says.

“What I would like to argue today is that policymakers face a clear
and sustained uphill battle, in which monetary ease has an ongoing role
to play, even if it may not deliver the desired sustained recovery on
its own,” he adds.

The core of Posen’s argument is that there is a significant output
gap in the UK, and elsewhere, and growth could be weak, failing to close
the gap, and unemployment high, unless policymakers continue to provide
stimulus.

“There remains a significant gap between what the economy could be
producing at full employment and it currently produces. Thus,
policymakers should not settle for weak growth out of misplaced fear of
inflation,” Posen says.

He strongly rejects the view the ultra loose monetary policy
already in place has put price stability at risk.

“If price stability is at risk over the medium-term, meaning over
the two- to three-year time-horizon for the MPC’s decisions, it is on
the downside,” Posen says.

Posen fiercely rejects the case repeatedly made by his colleague,
Andrew Sentance, for gradual policy tightening to start now. His
arguments make clear he believes Sentance has got the balance of risks
plain wrong.

“There are … some very serious risks if we make policy errors by
tightening prematurely, or even if we loosen insufficiently,” Posen
says.

He says the most serious risk is not double dip recession or
deflation but the risk 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,” Posen says.

“Those tendencies are already present, and insufficient monetary
response is likely to worsen them,” Posen says.

“The combination of those risks with the potential attainable gains
motivates my call for additional monetary policy stimulus,” he adds.

The speech appears to clear up another mystery in the September MPC
minutes. The minutes said: “One member was … concerned that the risk
of an adverse hit to the supply capacity of the economy had increased in
recent months,” with that risk that companies would shed staff and scrap
capital if growth disappoints”.

Posen clearly identifies himself with this view, highlights the
risk of supply capacity falling in the absence of further stimulus.

The MPC member looks at the lessons of previous financial crises,
with economies facing a long hard road to recovery following them.

“We are a long way from home, and a long, long way from
overheating,” Posen says.

He says recent data are not inconsistent with the recovery patterns
seen after other financial crises, with recovery a long drawn out
process played out against a backdrop of a dysfunctional banking system.

“Under the present circumstances, sustained high inflation is not a
threat … persistent high unemployment and output gaps are the threat,
and we should take further monetary action to sustain and promote
recovery,” Posen says.

Posen makes the case the financial crisis has not directly
destroyed a lot of UK productive capacity but rather this capacity is
idle and will decay over time.

The financial crisis “leaves for now large output gaps of
underemployed resources pushing down on inflation,” he says.

“Yet, the longer that growth remains below potential and that
output gaps persist, the more lasting damage is done to our economic
potential and to our citizens,” he adds.

Posen warns policymakers against the error of squeezing supply
capacity to avoid below target inflation outturns.

“To the degree that monetary policymakers have a choice about how
we maintain price stability, we should always prefer getting inflation
back from below target by offsetting insufficient demand rather than by
allowing aggregate supply to contract,” he says.

Further Easing Should Be Large Scale Asset Purchases

Having made the case for further easing, Posen goes on in the
speech to look at how the easing should be carried out.

He comes out in favour of large scale asset purchases (LSAPs) –
with the MPC so far having focussed these purchases – quantitative
easing – on gilts.

“Speaking for myself, I believe that if we were to loosen monetary
policy further, it must primarily take the form of large scale asset
purchases,” Posen says.

He says the impact of quantitative easing is uncertain and he sets
out his belief that large scale buying of private sector assets could,
in theory, be more effective than buying gilts. Posen, however, backs
the idea of the BOE sticking initially with gilt purchases if and when
it relaunches QE.

“My instinct, and I believe that I am not alone in this view, is
that purchasing private assets should have a larger macroeconomic impact
than purchasing government bonds,” Posen says.

It is a case Posen has made before, although BOE Governor Mervyn
King has been among those skeptical of the case for private sector asset
purchases.

“I am comfortable with the idea that in the UK, if not elsewhere,
additional monetary stimulus at this point should begin in the form of
additional QE as the Bank of England pursued by purchasing Gilts in
2009-2010,” he says.

Looking beyond QE II, Posen says that should further monetary
easing fail to have the desired impact on the economy then a renewed
fiscal stimulus should be considered, with the BOE buying the
Gilts to fund it.

“As a general proposition, if QE is less than effective due to
persistent excessive liquidity preference and deflationary expectations,
economic theory says that money financed fiscal stimulus is the right
response”.

–London bureau: +4420 7862 7491; email: drobinson@marketnews.com

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