–Adds Detail To Version Transmitted At 0805 GMT
–BOE Posen: Only Too Happy To Vote for Rate Hike if Justified
–BOE Posen: Confident Tighter Policy Would End Inflation Creep
–BOE Posen: Monetary Policy Set to Avoid Recession Too Loose If Works
–BOE Posen: Not Confident UK Economy Outturn Will be Favorable
–BOE Posen: Some Key Determinants for UK outside MPC Remit
–BOE Posen: UK Economy Tentatively in Recovery State

LONDON (MNI) – The Bank of England’s Monetary Policy Committee is
facing dilemma, that the UK economy is only tentatively recovering,
and could switch back into a recessionary state, and policy that is set
to avoid recession will be too loose if it is successful, MPC member
Adam Posen said Wednesday.

Posen said he would be “only too happy” to vote for a rate hike if
the economy continued to recover, and he said he was confident
tightening policy would reverse “inflation creep”. He added, however,
that he was not confident the economic outturn for the UK would be
favourable.

“The UK economy (is) tentatively in the recovery state, but still
subject to switching back into the recession state,” Posen told the
Society of Business Economists.

The MPC has set policy too avoid recession, but that will be too
loose if the recovery does become entrenched.

“Monetary policy set to be loose enough to prevent falling into
recession situation will be too loose if it is successful in preventing
that outcome – and will continue to feed a slow rise in inflation
expectations. I believe that this situation is still the one which the
UK economy faces, and thus the MPC must confront as well,” Posen said.

He said one way of interpreting the inflation forecasts in the
BOE’s May Inflation Report was that inflation was much more likely to
come in well above or below the BOE’s 2.0% inflation target than hit it.

“We are far more likely to have an economy with less than 1.5%
inflation or with greater than 2.5% inflation over our target horizon
than an outcome close to our target,” he said.

Posen said if the UK is fortunate, the present (ultra loose)
monetary policy stance and the UK economy’s “natural tendency to
recover” combined with sustained global growth would get the UK to a
desirable economic outturn.

The favourable economic outturn, however “would result in more
inflation overshooting in the interim, given our policy stance, and in
that state of affairs I would be only too happy to vote for an interest
rate increase,” Posen said.

If the MPC did tighten policy “I am fully confident that any
inflation creep would be reversed, and that British inflation
expectations would be totally reanchored.”

Posen said, however, that he was “not as confident … that
we will get to that favorable situation” and much of what will determine
what happens in the UK lies outside the countries borders and the MPC’s
remit.

The MPC is split at present, with committee member Andrew Sentance
voting for a rate hike at the June meeting while his colleagues
continued to support keeping Bank Rate at its historic low of 0.5%.

Posen attributed the rise in inflation, with CPI moving more than
one percentage point above target, in part to the MPC’s ultra loose
monetary policy.

“I see the inflation target overshoots that occurred over the last
two and a half years as the comprehensible result of a monetary policy
stance set to be very stimulating to prevent a terrible downside risk of
deflation and depression,” he said.

The “mildy rising UK inflation cannot be simply explained by one
off factors, such as the increase in the oil price and the rise in VAT.

“The most logical and empirically reasonable explanation for
inflation creep is some unanchoring of inflation expectations, caused by
the series of above target outcomes for UK inflation in recent years,”
he said.

The impression that the MPC was standing by as inflation overshot
has contributed to the move of inflation expectations away from target,
Posen said.

He urged his fellow MPC members to be more open about why policy
has been left ultra loose – to avoid recessionary and deflationary
risks.

“If we dismiss all relative price shifts against wage earners as
one-time effects that the MPC encourages the public to ignore, and that
the committee itself certainly will look past, then there will be
understandable questioning of what is the greater purpose of the
inflation target that allows such inflation to occur,” he said.

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

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