LONDON (MNI) – The end of the UK’s scope for fiscal stimulus is
approaching, and thankfully policymakers are heeding the warning signs,
Bank of England Monetary Policy Committee member Adam Posen said in a
question and answer session Monday.

Posen, asked if the time was over for fiscal stimulus, said the US
still had a lot of road to use up before it had to end stimulus, but the
UK was coming to the end.

“The UK is somewhere where we can see the end of the road
approaching,” Posen said.

“The UK, thankfully … is paying attention to the signs that says
‘caution’, ‘last exit’ as opposed to certain other countries that aren’t
seeing those signs,” Posen said.

Posen also said the main UK political parties have been right to
draw the line on fiscal expansion.

He said that while the UK had a very strong reputation
internationally, having never defaulted on its debt in “100s of years”,
it was right to announce an end to fiscal largesse.

“I do have to draw a line here in the UK,” Posen said, in
reference to fiscal expansion.

“The three parties who ran for office were right to say we are
going to have an age of austerity,” he added.

The Conservative/Liberal Democrat coalition that came to power
following the May election has already unveiled the first fiscal
tightening steps, with the public spending cuts coming into force in the
2010/11 fiscal year.

The BOE MPC member was also asked whether he thought the BOE should
take responsibility for financial regulation.

He restated his view that what mattered was not which body was
responsible for regulation, but whether it was based on rules or
discretion. He advocated a strict rules based approach.

The new UK government has advocated giving the BOE responsibility
for macro-prudential supervision, although details are still being worked
out.

In comments in his earlier speech, which departed from text, Posen
noted that UK inflation is currently running above 3% compared to the
2.0% target, but said that while he was not unconcerned about inflation
it was better to have an overshoot than to experience deflation.

In his earlier speech, Posen looked at the comparisons between the
current UK economic challenges and those of Japan during its lost
decade.

He highlighted the difficulties facing the UK if it wants to base
its recovery on export growth, noting the country’s main export market
is the euro area and “the prospects for strong growth in most of the
Euro Area are rather dim for the next several years.”

Posen also said that the UK’s fiscal tightening will hit aggregate
growth and noted the BOE, with Bank Rate already very close to the zero
bound, could not respond with a rate cut but only by postponing a rate
hike.

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

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