Posen urges Bank to forget inflation 'ghost' to save economy

The economist Adam Posen yesterday accused his fellow Bank of England policymakers of leaving the country heading towards economic "tragedy" by failing to implement another round of monetary stimulus for the weakening economy.

Mr Posen, an external member of the Bank's Monetary Policy Committee, urged colleagues to "do the right thing" – to look beyond fears about rising inflation and return to a programme of quantitative easing that might breathe new life into the stalling economic recovery.

The American also called on the Bank and the Government to establish a new public lending bank to ensure that more credit reached struggling small businesses.

The clarion call for monetary action came as the Office for National Statistic reported that UK consumer price inflation (CPI) rose to 4.5 per cent in August, more than double the Bank of England's 2 per cent target. Retail price inflation (RPI) rose to 5.2 per cent last month from 5 per cent in July.

However, Mr Posen argued that "the lion's share" of the above-target inflation rate was attributable to sterling's depreciation since 2008, which has made imports more expensive, rather than the quantitative easing programme that has been enacted.

He also said the UK's weak recovery would drive down prices in the near-future. "There is no reason to think that there will be sustained higher inflation in the UK, or even that core inflation will remain at current levels," he said, adding that those who had voiced alarm about inflation were "chasing economic ghosts that are not there".

CPI was driven higher in August by higher electricity and fuel costs. Another increase is expected next month as higher energy bills continue to feed through to the index.

Mr Posen warned that monetary authorities around the world were on the brink of a historic mistake in failing to increase stimulus at a time of severe global economic weakness. He cautioned them against listening to "unduly influential voices" who claim that policy stimulus would be ineffective or destructive. "If we do not undertake the stimulative policy that the outlook calls for, then our economies and our people will suffer avoidable and potentially lasting damage" Mr Posen said.

As well as calling for an immediate extension of the Bank of England's programme of gilt purchases by up to £100bn, Mr Posen wants the Government to establish a new bank specifically mandated to lend to small businesses and start-up enterprises.

He also called for the establishment of another financial firm to securitise the loans made by this new bank in order to remove them from its balance sheet and create scope for still more credit flows.

Both these new financial institutions should be supported by the Bank of England, Mr Posen said.

He implored the Bank of England to seize the opportunity to work with the Coalition to increase lending flows in this manner, warning that "tragedies have occurred... when independent central banks let worries about the perception that they are too close to the fiscal authority prevent them from doing something constructive in times of crisis".

The Monetary Policy Committee voted to kept interest rates at 0.5 per cent earlier this month and decided not to extend the programme of quantitative easing.