Adam Posen, the arch-dove of the Bank of England's Monetary Policy Committee, has issued his loudest call yet for the world's central banks to embark on another round of quantitative easing in order to prevent a return to global recession.
"It is past time for monetary policy to be doing more to support recovery," wrote Mr Posen in an article for Reuters. "Additional monetary stimulus is the last line of defence for the advanced economies today. G7 central banks should purchase more assets if we are to have any hopeof our economies ever catching up."
Mr Posen's call for action coincides with more gloomy news about the state of the British economy. The GfK NOP index of consumer confidence fell for the third consecutive month in August. Meanwhile, the British Chamber of Commerce (BCC) today revises its growth forecast for the UK in 2011 down from 1.3 per cent to 1.1 per cent.
Mr Posen, who joined the MPC in September 2009, has been pushing for the Bank of England to increase its £200bn asset purchase scheme for more than a year. But this is the first time the US economist (who is also an expert on Japan's two-decade long slump) has urged other central banks to do the same. The nine-strong MPC, chaired by the Governor of the Bank of England, Sir Mervyn King, is responsible for setting interest rates in the UK. Its primary purpose is to keep inflation at 2 per cent. But it can also, in exceptional circumstances, buy British sovereign debt in order to stimulate the economy.
Mr Posen rejected the argument that previous rounds of quantitative easing in both the UK and the US had failed. "The evidence is clear that the Bank of England's and the Federal Reserve's asset purchases had a positive significant effect on consumption, on the relative prices of riskier assets, on credit availability, and on liquidity in the financial system," he argued. "If the improvement was insufficient, because the response to a given injection was less than some hoped, increase the dose."
There are signs that the wind is blowing Mr Posen's way in policy circles. Minutes from the most recent meeting of the MPC released last month showed that Spencer Dale and Martin Weale, two MPC members who had previously supported a rise in interest rates, had changed their minds after seeing disappointing UK and international economic data. The MPC voted 9-0 to keep rates at a record low of 0.5 per cent.
Mr Posen was the only member who voted in favour of increasing the Bank's asset purchases by £50bn. But two other members said they would consider joining him in future if economic conditions continued to deteriorate.