During a speech the most dovish member of the Bank of England’s Monetary Policy Committee, the American economist Adam Posen, has rubbished calls by the Bank for International Settlements for the UK to raise its interest rates.
(What are your thoughts on interest rates? Vote in the poll below.)
He also drew parallels between the current economic crisis and the 1930’s depression during the speech called ‘Why Stagflation is Unlikely’ and said that the BIS was incorrectly comparing today’s situation with the 1970s when central banks failed to raise rates quickly enough to head off inflation.
The BIS has recently issued its 81st annual report saying that the UK amongst others should consider raising rates faster than it has in the past after economic downturns.
Posen’s response is that this is ‘nonsense’ as there is scant evidence of rising inflation. In fact Posen has even called for more quantitative easing in order to further kick-start the economy.
Mr Posen puts forward the view that tightening economic policy too fast after the Great Depression caused all the problems and even had a hand in sparking WW2 and says that is the position the UK is in today.
Adam Posen pointed out in the speech at Aberdeen University that ‘In the UK and the West more broadly, there is little or no credit growth, little wage growth beyond productivity, little evidence of rising inflation expectations, and oil prices are not yet a one-way bet’. This he says is in contrast to the 1970s model on which the BIS are basing their recommendations
The MPC has now kept interest rates down at historically low levels for over two years and CPI, at 4.5%, remains stuck at more than double the Bank of England’s target of 2%.
But Adam Posen believes that while ‘workers have limited power over wages’ coupled with a lack of credit there is little chance of inflation.
However, whatever the MPC, Adam Posen or the BIS think, what is your view? Vote in the poll below.