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October 12, 2010    

MPC member suggests monetary policy will remain on hold

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by Kay Murchie

Professor David Miles, who joined the Bank of England’s Monetary Policy Committee (MPC) in June 2009, has today hinted that monetary policy will remain on hold for the short-term.

Speaking in Dublin today, Mr Miles warned that the Bank faces a dilemma as to whether to take more notice of inflation or the threat of economic growth grinding to a halt.

He warned that premature “tightening of monetary policy” could impact negatively on the UK economy and this raises the question about what action either the Government or the Bank of England will take.

Many experts and two fellow policymakers have argued that more money needs to be injected into the economy, via the quantitative easing (QE) scheme, to withstand the impact of massive spending cuts and the forthcoming VAT rise.

QE, also known as printing money, is a process whereby the Treasury injects funds into the financial system to ease pressure on banks by giving them extra capital.

The Bank embarked on its £200 billion QE programme in March 2009, when the economy was in the midst of its worst recession in more than five decades.

Meanwhile, today, the Office for National Statistics (ONS) announced Consumer Price Inflation (CPI) held steady at the annual rate of 3.1% in September.

The latest figure represents the tenth consecutive month that inflation has been above the Bank of England’s target of 2%.

Stubbornly high inflation has raised the prospect that interest rates should be lifted from their current low. One policymaker, Andrew Sentance, has voted for a hike in interest rates at the last four rate-setting meetings.

The Committee, though, appear to be split with Martin Weale and Adam Posen calling for more stimulus to boost economic growth, while Mr Sentance continues his call for higher rates.

It is yet unclear how policymakers voted at last week’s meeting but all will be revealed when the minutes are published on 20 October.

Meanwhile, Professor Miles concluded that it was almost impossible to say whether current monetary policy was too loose or too tight. “It is inconceivable that you can get monetary policy exactly right,” he said.

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