An outgoing member of the Bank of England’s (BoE) Monetary Policy Committee has challenged the governor Sir Mervyn King for his insistence that central banks should buy only government bonds in quantitative easingprograms to stimulate growth.
Adam Posen told the Financial Times that the BoE could be much more effective in fostering economic recovery if it ditched “anguished religious ethics” over what it considered reasonable intervention.
In an interview before he departs to head the Peterson Institute for International Economics in Washington, he suggested the BoE should target measures to unblock financing constraints for mortgages and small businesses.
“I have no question in my mind that what we’re doing with QE is preventing things from getting much worse, but that doesn’t mean you couldn’t have an additional or better instrument,” he said.
Rejecting the standard view of central bankers that only elected governments can buy private sector assets, he added: “I personally view the teeth-gnashing and garment-rending about what’s fiscal and monetary as too much drama for too little content.”
“As long as the central bank isn’t monetizing government debt in the primary market—directly buying from the government so it can expand fiscal policy—I don’t think it really matters that much what assets the central bank acts on.”
Last week, the MPC issued its lowest forecast for UK medium-term growthsince it was created in 1997, saying the economy would probably be growing at a rate of about 2.1 percent a year in two years’ time.
In a warning that proposed new structures for the BoE might lead to a loss of external challenge on the MPC, Mr. Posen urged officials to ensure monetary policy makers had access to the necessary tools to keep inflation close to its 2 percent target.
“I really feel the MPC does have to have the authority to make up its mind on what instruments it wants to use and not be constrained by either the BoE executives saying, ‘We don’t want to do x’ or ‘That’s the financial policy committee’s territory’.”
Under Sir Mervyn as governor, BoE executives have jealously guarded their power to determine how the money created by QE is spent. These powers and many of the ways the BoE operates are open for significant reform under a new governor, likely to be selected this autumn.
Having served a three-year term on the MPC, during which the UK economy barely grew, Mr. Posen became known for his dovish views, regularly urging other MPC members to do more to stimulate the economy.
He said the outcome could have been “significantly better” had the BoE acted sooner and more decisively to signs of faltering recovery, although he accepted that fiscal consolidation, the euro crisis and a broken financial system would have always frustrated a recovery.