NOTTINGHAM (MNI) – The Bank of England’s Monetary Policy is right
to assume that inflation will keep falling, that the UK will return to
at least close to its long-term trend rate of growth and the committee
is right to consider doing more quantitative easing at next month’s
meeting, MPC member Adam Posen says.

Posen says the MPC can step up QE “without limit” if things really
take a turn for the worse, but that the amount it will sanction will be
determined by the February Inflation Report projections. The MPC
sanctioned a total of Stg200 billion during the first wave of QE and
Posen said it was right that the committee was looking at less now.

The MPC approved Stg75 billion of QE back in October, with the
asset purchases taking four months to complete and analysts are split
over whether the MPC will back another Stg50 billion or Stg75 billion in
February.

In a question and answer session with reporters, Posen cited the
recent Market News International interview with MPC member Ben Broadbent
and said Broadbent’s views on the way the decisions had been taken on QE
were representative of the MPC as a whole.

Broadbent argued strongly the decision on the total amount of QE
was not influenced by the pace at which the assets could be purchased
but by assessing the total stock of asset purchases the MPC believed was
justified by the inflation forecasts.

“He (Broadbent) basically said there is kind of a logical reason
for the number we did (in October) but there is really no tight
constraint and I think, frankly, that is a fair representation of the
committee” Posen said.

“We didn’t pick Stg75 billion out of the blue. First order is we
thought it is the roughly the right amount and, if you think about the
fact I was pushing for Stg50 billion and then we waited a long time
before we did anything, the fact we wanted to do more than I initially
said would make sense,” Posen said.

“Stg75 (billion) was trying to scale it to what we thought was
going on with the forecasts,” he added.

“Second to that, but still important, is not (to) disrupt the DMO
operations, not disrupt the markets. If things really got bad, we can
rank it up without limit and we won’t hesitate,” Posen said.

“There was no point doing anything less than Stg50 billion and if
doing Stg175 billion was enough in the worst of the crisis it is
probably reasonable that we are doing less than that now,” Posen added.

“I don’t want to pretend there is huge precision to this but the
main driver is ‘this is a reasonable number’ in light of the forecasts
and, secondarily, it is something the markets can deal with,” he said.

He added a caveat to Broadbent’s view that the stock of QE is of
paramount importance, saying flow is not irrelevant.

“The majority of the committee is willing to admit there is some
flow aspect to it and there is also a logistical flow aspect to it but
even the people like me are willing to admit that the stock is,
ultimately, what counts,” Posen said.

“If we chose to do more (QE) in February which we may, or may not,
but if we chose to do more in February it will be because the forecasts
demand it. It is not going to be because we pre-committed to anything,”
Posen said.

Asked about whether the MPC wanted to step up, or step down, the
pace of QE Posen backed Broadbent in saying this was not a factor.

“What you are talking about in terms of pace … is really not
something the committee is talking about. It is primarily about what is
the right number and secondarily, operationally, subject to getting the
right number out there how do we not screw up the markets and the DMO,”
Posen said.

Asked how things had changed since October, Posen said they had got
a little better.

“Speaking for myself, things are a little better than they were in
October,” Posen said.

He gave four reasons for this.

“First, we did take policy action … and that has made a material
difference,” Posen said.

“Second, the ECB undertook these LTROs … that may not be ideal,
it may not solve everything but it certainly removes for a reasonable
length of time some of the downside risks,” he said.

“Third there has been genuine upside news, or potential for upside
news, in place outside of Europe and the UK, particularly the US and in
terms of how smoothly the China economy is slowing down,” Posen said.

“Fourthly there was, if you look back at August, September, October
… largely due to the euro crisis, there were … some signs of lock-up
in bank funding markets. Those, in part due to our actions … have been
reduced,” he added.

In his earlier speech at Nottingham Business School Posen said
inflation has fallen and will continue to do so. He said the recovery
has not been strong and productivity growth has been weak, but it is
wrong to think the UK will not return to the trend rate of growth in
place for the past 120 years. With potential growth little changed and
inflation declining, Posen sees scope for more QE.

He said most members of the MPC also expected the UK to return,
more or less, to its long term trend growth rate. His comments come at a
time when the UK recovery appears to have stalled, with the upcoming Q4
GDP data expected to show the economy contracted a little on the
quarter.

In the speech Posen focussed on whether trend UK productivity
growth has changed. He said people should not worry about the current
blip in productivity growth.

He looked at the evidence from the labour market and said while
there had been some erosion of the workforce and of skills, this has
been very slight.

He argued that the UK labour market was as healthy as it used to
be, with flexibility still in place. The relationship between growth and
unemployment has not deteriorated. If anything, unemployment growth has
been surprisingly low given the weakness of the economic recovery,
although recent data do show jobless levels rising.

–London newsroom: 4420 7 862 7491; email: drobinson@marketnews.com

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