BoE's Posen says economy stronger than it looks
By David Milliken | April 20, 2012 3:30 AM IST
Britain's economy is healthier than upcoming official data is likely to show, but the Bank of England may have a hard job convincing the public that this is the case, BoE policymaker Adam Posen said on Thursday.
Posen, a long-standing advocate of the BoE's policy of quantitative easing, shocked financial markets on Wednesday when BoE policy minutes revealed that he no longer supported further gilt purchases.
Speaking to reporters at an Edinburgh banking conference, Posen said he had been "genuinely on the fence" when he voted in February and March to raise the BoE's asset purchase target to 350 billion pounds.
Although some survey data had weakened in the past month, overall it confirmed an upward trend in Britain's underlying growth, and gave him confidence that the economy did not need additional stimulus, he said.
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Moreover, it was the total level of QE that the BoE had undertaken that was the main thing stimulating the economy, rather than purchases in a particular month, Posen said - in economics jargon, the 'stock' of asset purchases rather than the 'flow'.
Wednesday's BoE minutes warned that official gross domestic product data due next week could show a fall in output due to weak construction figures which the central bank said were hard to understand.
Coming after a 0.3 percent fall in GDP in the last three months of 2011, this would put Britain into a technical recession - and contraction in the second quarter of 2012 was possible too, due to an extra public holiday.
Posen shared this view, and said the problem for the BoE could be more than presentational.
"The concern ... is people will see these numbers and react to them in negative confidence terms that we don't think are justified," he said. "There's no good way of ducking that."
He like, BoE deputy governor Paul Tucker, had serious doubts about the construction data produced by the Office for National Statistics for December and January, as unlike a year earlier, the weather had been good and house prices were stable.
Posen said that the hoped the public, like the BoE, would look beyond short-term dips in GDP in the same way that the central bank had looked past previous upward spikes in inflation.
"There's a truth that is different from the numerical reality," he said.
Posen also said that he remained confident that inflation would return to its 2 percent target by the end of 2012, despite an uptick in March and his concerns about apparent stickiness in 'core' inflation measures that strip out energy and food costs
British consumer price inflation rose for the first time in six months in March, increasing to 3.5 percent from 3.4 percent, in contrast to BoE forecasts in February that it would fall steadily this year below its 2 percent target.
After this data came out on Tuesday, Posen told reporters that the BoE would have to rethink its approach if there was no fall in core inflation - which excludes volatile food and energy prices. He reiterated this point on Thursday.
Earlier on Thursday, Posen said in a newspaper column that he stood by his promise in March last year not to seek another three-year term on the BoE Monetary Policy Committee if his inflation analysis proved to be wrong. But he said he should not be held to a forecast of 1.5 percent inflation for summer 2012.
"That was when some MPC members were voting to tighten policy and no one else was voting for additional ease. Of course, the inflation forecast is higher now than it was then precisely because, rightly, we did more QE," he said.
"What is more challenging to my analysis, and more concerning for the economy, is that core inflation has plateaued for the last three months rather than trending down."
Posen's term on the MPC ends in August, and in March he said that he would decide this month whether to seek another term.
(Additional reporting by Fiona Shaikh; editing by Gunna Dickson)
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