Why I Changed My Vote
Op-ed in the Independent
Note: The author is an external member of the Bank of England’s Monetary Policy Committee, and a senior fellow at the Peterson Institute for International Economics. The views expressed here are solely his own.
Allow me to explain my vote for no change to policy at the April Monetary Policy Committee (MPC) meeting. This seems to have surprised people, but it really should not have. I have been saying publicly since the February meeting that there is very little distance between the Committee’s modal forecast and my own forecast—in contrast to last summer before we undertook additional asset purchases. This means that I believe the risks are largely balanced around inflation being below but close to target over the forecast horizon, starting at the end of this year, and that GDP growth will continue to improve from here through 2013, as a result of the additional quantitative easing the MPC rightly undertook since October 2011. (The welcome additional monetary easing by the European Central Bank [ECB] and the US Federal Reserve, in line with what I called for last October, also has had a beneficial effect on the UK economy and the world).
I never was an automatic vote for more quantitative easing (QE)—my votes are always based on my forecast. By definition, if QE has the desired effect to loosen monetary conditions, and I believe it does, there has to be some amount that is enough to return inflation to our medium-term target for any set of economic conditions. Given my and the Committee’s current forecast, we have to be close to that right amount, that correct setting of policy, on current data. We cannot know precisely the right amount to do when setting any kind of monetary policy, but the uncertainty is greater with QE than with interest rate cuts in normal times, as I noted in my first speech as an MPC member in October 2009. That is why I said several times in public since our February meeting, including before the Treasury Select Committee, that the additional £25 billion of asset purchases being discussed was not a big deal—especially compared to how far we’ve come since September 2011, from when the MPC voted 8-1 against further easing and was seen at risk of raising rates in the near-term, to having purchased an additional £125 billion in gilts.
The latest data convinced me that for now an additional £25 billion could be unnecessary. By the latest data, I do not mean one month’s outturn on the headline consumer price index (CPI), however disappointing—neither I nor anyone else on the MPC will set our forecast based on one data point subject to so much monthly variation. What I mean is our making sense of the mass of the range of indicators from business surveys and latest labor market data (though again, not to make too much of one data point) that underlying growth is picking up—that is, that QE and the British economy are responding as I expected it would—with the mixed indicators on inflation. The MPC has to consider in making its forecast not only the latest CPI, but also the steadily low wage growth and the anchored inflation expectations.
In terms of accountability for my own record, I stand by what I said in March 2011—if I am basically wrong about the forecast, I will not seek reappointment. When I forecast at that time 1.5 percent inflation and trending down 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. 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.
But I have been right in forecasting for the UK that over the last two years consumption growth would be weak, that wage growth would be anemic, that short-run inflation expectations would come down, that long-run inflation expectations would remain anchored, that small- and medium-sized enterprises (SMEs) would need help to access credit, and that additional QE would stimulate the economy without either sparking an inflationary spiral or weakening sterling. That is consistent with a mainstream macroeconomic analysis of the British economy given the situation. Even a couple of months of sticky core inflation numbers, and certainly just one data point on headline inflation, do not falsify that analysis. I expect that the coming months of data will demonstrate the validity of this analysis. So neither the MPC nor markets should overreact to one month’s number, or even to one vote. We will make a forecast that makes best sense of current conditions, and vote accordingly, whether that is for more QE or not.