In one of his most "doveish" interventions since the end of the recession, Sir Mervyn King, the Governor of the Bank of England, signalled yesterday that there would be no rise in interest rates until there was clearer evidence that the economy was growing and that unemployment and the interest rates actually paid by consumers were falling.
Having apparently led the key group on the Monetary Policy Committee (MPC) who have voted to keep interest rates and quantitative easing on hold since the spring of 2009, the Governor placed himself firmly at the doveish end of that strand of opinion as he and other members of the MPC gave evidence to the Treasury Select Committee.
Sir Mervyn stressed that a further round of quantitative easing (QE) – the direct injection of money into the economy to boost asset prices and spending – was an option. "I regard QE as a perfectly conventional monetary policy tool. This is something we can do. I think it's of particular relevance when rates are low," he said, though he cautioned "if we feel there is a threat to inflation caused by easing policy, then we won't do it".
The last set of MPC minutes, relating to the meeting earlier this month, revealed a shift in opinion towards the lonely stance taken by Adam Posen, an external appointment who has consistently argued for further stimulus in the face of very weak prospects for demand and inflation next year.
Mr Posen himself again stressed the headwinds facing the economy yesterday: weak consumption, minimal pay rises and the failure of financial markets to signal a hardening in inflationary expectations. He told MPs that the MPC had made a "judgement call" that the present pace of inflation in commodity prices would not be sustained.
Sir Mervyn said: "We expect to see relatively weak consumer spending. The fall in house prices has come back a bit, activity is very weak. But the number of repossessions is way down from what we saw in the early 1990s.
"The reason we would raise interest rates would be in the context of a much stronger economy, with unemployment falling rather than rising. It should also be the case that the interest rates that borrowers face should not rise as fast as the rise in Bank rate."
David Miles, another external appointee, also stressed the "extremely fragile" condition of consumer confidence, something which itself could develop into a self-fulfilling phenomenon if it further chokes spending.
But the Bank's Deputy Governor, Paul Tucker, who has voted with the Governor, was more cautious about further easing. While Mr Posen has dismissed the recent call by the Bank for International Settlements for tightening as "nonsense", Mr Tucker argued that it should not be set aside. "This is not a committee that's drifting towards thinking that more stimulus may be needed. The threshold for me [for more stimulus] is high. I'm one of those that is worried about an upward drift in inflation expectations. The longer that inflation remains so high, and we say it's due to another one-off factor, the more the people of this country think we use this 'one-off factor' in a completely different way."