Fiscal strategy: Members of the public take a break in the sunshine outside the BoE headquarters in London. The bank will unwind its quantitative easing carefully, making interest rates its main monetary policy tool. — AFP
LONDON: Central banks need to pay more attention to how the money supply affects inflation, the economy and their own policy-transmission mechanisms, Bank of England (BoE) chief economist Huw Pill says.
In a speech to the Walter Eucken Institut in Germany, Pill said more work was needed on “how monetary variables can help keep inflation at target sustainably and credibly over the medium term.”
His comments followed claims by advocates of monetarism that the current high levels of inflation were caused by an explosion in the money supply after central banks printed trillions of dollars through quantitative easing (QE) since 2008.
United Kingdom inflation is currently at 9.1%, more than four times above the BoE’s 2% target.
The BoE has raised rates at five consecutive meetings to 1.25%, most recently by quarter point this month – a decision Pill backed.
Pill stressed that he was not advocating a return to monetarism but a re-evaluation.
“My own read is that the elevated level of UK inflation stems largely from the impact of external shocks, rather than excess money growth in the past,” he said.
“Given the tightness of the UK labour market and perceived strength of pricing power in large parts of the corporate sector, the threat exists that higher headline inflation leads to second round effects in prices, wages and costs that exacerbate the magnitude and, crucially, the persistence of the target overshoot,” Pill said.
His thoughts on the immediate challenge were echoed by Jonathan Haskel, an external member of the monetary policy committee who was in the minority of three voting to hike rates by a half point this month.
Speaking separately at Chatham House in London, Haskel said that monetary and fiscal policy were not to blame for the current inflation shock.
“If you’re going to look for a culprit for current inflation, at least in Europe, I do not believe we should be looking towards reckless monetary or fiscal policy,” Haskel said.
Pill’s speech was an attempt to resurrect elements of monetarist thinking that have been broadly banished from mainstream macroeconomics for over two decades.
“While monetarism remains unfashionable in academic and central banking circles, perhaps it has contributed more to the past, present and potential future of monetary policy than we conventionally admit,” he said.
Monetarism, the study of how the supply and quantity of money can drive prices as championed by Milton Friedman in the 1980s, may now have something to offer as a result of the explosion in central bank balance sheets since the start of QE, Pill argued.
The use QE “inevitably begs the question of whether monetary quantities have re-asserted themselves in the conduct, transmission and communication of monetary policy.”
Pill said the BoE would unwind its £895bil (RM4.8 trillion) of asset purchases under QE carefully, which would allow it to make the interest rate the main tool of monetary policy.
“Gradualism will help reduce the potential for market dislocation,” he said. — Bloomberg
