MPC’s David Miles open to changes at the Bank… but only in a crisis

How can an MPC member be bullish and still want more quantitative easing? David Miles explains the apparent paradox to Russell Lynch

It's a welcome change to hear a bit of optimism on the economy
after dire growth figures triggered a predictable flurry of
triple-dip recession headlines last week. The unlikely source is
the Bank of England's Monetary Policy Committee member David Miles,
whose upbeat attitude is initially difficult to square with his
calls for an extra £25bn to be pumped into the UK through
quantitative easing.

Since the departure of Adam Posen last autumn, he's been the sole standard bearer for more money printing, but is yet to convince colleagues. It's certainly a bold demand, with concerns over inflation to the fore and the consumer prices index likely to be heading above 3 per cent in the summer. A host of one-offs - VAT rises, oil shocks and food prices - have blown the MPC away from the totemic 2 per cent target for most of the past five years and the cost of living now stands at 2.7 per cent.

Mr Miles has sat on the MPC since 2009, joining from his previous job as Morgan Stanley's chief UK economist to take residence in the Bank's eyrie of offices for MPC members overlooking the Royal Exchange in the heart of the City. Before joining the investment bank he carried out a review of the mortgage market for the-then Chancellor, Gordon Brown, in 2003: later he - presciently - predicted a housing crash in November 2006.

The UK is in a low productivity bind, using more to produce less, which continues to puzzle the Bank's finest minds, including Mr Miles. The economy sank another 0.3 per cent between October and December, while employment bizarrely hit a record high of nearly 30 million. But Mr Miles is advocating more QE because he thinks there is more room for a weak economy to grow without pushing up inflation and argues we're at risk of permanent damage by failing to act. This puts him at odds with the MPC's hawks, arguing of the dangers of more stimulus simply fuelling inflation, if there isn't as much slack in the economy due to recession as thought.

Mr Miles says: "There is a bit of noise in there but if you look back over the last year or so growth is pretty close to zero. I'm a bit more optimistic that growth is going to pick up … but I suspect that it will still remain for the next year or so beneath what you might call the average cruising speed for the British economy.

"If that is true, I think we will have growth which will not reduce the amount of spare capacity or slack in the economy, and I think domestically generated inflation pressures remain pretty muted.

"The strongest sign of that is what is happening in the labour market, where wage settlements have remained at very low levels even though inflation has been above the target. I suspect that if we were able to generate stronger growth, rather than that increasing substantially inflation pressures - it would more likely show up in stronger productivity growth."

He warns pointedly: "The danger of remaining in a situation where growth and demand are very anaemic and weak is that you actually reduce the productive capacity of the economy."

The minutes show doubts among his MPC colleagues over the impact of further QE, leading to speculation the Bank might shelve it. Mr Miles describes QE as a "very powerful tool" and is at the "optimistic end of the spectrum" on its effectiveness, although he admits nobody at the Bank feels very sure. More certain is that another burst of QE would be bad news for the pound, down 2.9 per cent against a basket of currencies this year. With the UK's high current account deficit offering signs a high pound is hindering efforts to rebalance the economy, Mr Miles expects the pressure on sterling to continue: "I think there's a case that sterling may not have yet found its right level."

But one thing he seems convinced about is that there is a way back for the British economy and the squeezed pay packets of its workforce. "I'm certainly not so pessimistic as to believe that for the next five or 10 years we will continue to be in a situation where most people are accepting an annual wage settlement below the rate of inflation. That's where we have been for the last three or four years. I don't think this is a permanent feature of the economy."

Mr Miles also believes the real-term pay cuts endured by most workers will be over before long, "a year or 18 months down the road".

He says: "There is a pessimistic view that the mess we've been in, the financial crisis and the aftermath of it means that in the future we should expect growth to be very substantially lower than the 2-2.5 per cent level. I'm not convinced by that and I think it is likely that the cruising speed of the economy may well get back to that long-run average. I don't think we have to put up with half or 1 per cent growth for the rest of our lives."

Households under pressure, and in particular the Chancellor facing another year of bust borrowing forecasts, will hope he's right sooner rather than later.

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