“It’s the main question that keeps me and my colleagues at the MPC up at night. That’s why in our last set of forecasts….we stressed there are upside risks. The slack in the economy is not pushing down on inflation the way we’d like…core inflation is higher in the UK; it’s not dragging down like it is in Europe or in the U.S. But I would rather have this problem…than be facing deflation.” – Bank of England (BoE) Monetary Policy Committee (MPC) Member Adam Posen, May 20, 2010. Posen was answering why inflation remains stubbornly high in the U.K. unlike in other industrial economies that are struggling with deflation. The interviewers tried to get Posen to reveal when the Bank of England would start raising rates. The underlying assumption was that it had to be sooner than later.
Four months later, Posen is credited for sparking a small sell-off in the British pound by suggesting that the Bank of England needs to consider more quantitative easing. In a speech titled “The Case for Doing More“, Posen asserts:
“If there was going to be a recovery that either was inflationary or otherwise meaningfully different from that established pattern, it should have been evident by now. Absent evidence of a truly different recovery, the analysis of mainstream macroeconomics should apply …That proven analysis tells us that, under the present circumstances, sustained high inflation is not a threat, that persistent high unemployment and output gaps are the threat, and we should take further monetary action to sustain and promote recovery.”
Clearly, Posen and his colleagues are sleeping much better at night these days.
Be careful out there!
Full disclosure: long GBP/JPY, short GBP/AUD, long EUR/GBP