Central Banks Need to Act This Month: Bank of England’s Posen
Staff Writer, CNBC.com
The Federal Reserve, European Central Bank (ECB) and Bank of England (BoE) should all announce stimulus packages next month, a Bank of England (BOE) policymaker told CNBC Tuesday.
Adam Posen, a member of the BoE’s monetary policy committee (MPC) and a senior fellow at the Peterson Institute for International Economics, called for all three central banks to act “in a targeted way.”
Speculation about their actions has fuelled markets during a quiet August. (Read More: Market Will Heat Up in September)
Fed Chairman Ben Bernanke “should announce” more quantitative easing in his speech at the Jackson Hole meeting on Friday – both because the Fed has indicated it is coming, and because of its merits, Posen argued. (Read More:Federal Reserve Explained)
He believes a further round of stimulus “could be very effective” and that the Fed should act as if there was no election. Some analysts have suggested that the committee may wait until after the November election to act, so that they are not seen to be backing one candidate over another.
“The U.S. has still got mortgages to restructure, and buying and selling securitized mortgages is the main way they can affect this,” he added.
“If the world is in slowdown, they should be trying to stimulate demand at home.”
Posen, who will step down from the Bank of England’s MPC on August 31 to become President of the Peterson Institute, also called on the ECB to intervene in the bond markets. Speculation that the central bank may buy up Spanish and Italian bonds to stop yields rising to unsustainable levels fuelled a rally in European markets earlier in August. (Read More: Markets Bracing For More ECB Bond Buying)
“Targeting Spanish and Italian debt would be the right thing to do. It’s time for them to get on with saving the euro . They have to stop the panic in the sovereign bond market,” he said.
Posen added that he regretted not pushing for quantitative easing sooner in the U.K., and that bringing in stimulus sooner “could have made a difference to the outcomes for the British economy.”
“There’s no question that more does have a positive effect on the economy. That said, there may be other ways to deal with the problems,” he said.
Posen was one of the few economists who warned that fiscal contraction in the U.K. was going to be worse than consensus forecasts. When growth figures for the second quarter showed a contraction of 0.5 percent, many economists were forced to cut their forecasts for U.K. GDP this year. (Read More: UK Government Under Pressure)
He also regretted not pushing sooner for specialized institutions to help small business lending, which has become a political hot potato in the U.K. as worries about access to credit, and demand for it, from the country’s high street businesses have grown.
“In the UK, we have a damaged banking system. It might be better to go around it to new competitors and products than through the system,” he said.
“There should be something like a good version of Freddie Mac or Fannie Mae – Benny – to bundle together small business lending.”
He said there was appetite out there for more lending to small businesses from politicians and the MPC but that hasn’t been delivered yet.
Written by Catherine Boyle, CNBC. Twitter:@catboyle01