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Bank of England may need policy rethink unless CPI eases

A plaque depicting Britannia is seen on the outside of the Bank of England in the City of London February 4, 2010.


Bank of England policy maker Adam Posen said on Thursday his decision to stop voting for more quantitative easing was due to signs that Britain's economy was picking up, as well as "mixed" news on inflation.

Mr. Posen had been a flag-bearer for more economic stimulus, and on Wednesday financial markets all but ruled out the possibility of more quantitative easing next month after minutes of the Bank of England's April policy meeting showed he did not support further asset purchases.

Until then, signs that tensions in euro zone debt markets were increasing, as well as weak official data on British factory and construction output, had caused some economists to predict that further quantitative easing was becoming more likely, not less.

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Mr. Posen, in a blog for the Independent newspaper and an interview with its regional sister paper, the London Evening Standard, said his change of view should not have been a surprise.

"The latest data convinced me that for now an additional £25-billion ($40-billion U.S. of quantitative easing) could be unnecessary," he wrote on the Independent's website.

"By the latest data, I do not mean one month's outturn on the headline CPI, however disappointing. What I mean is ... that underlying growth is picking up – that is, that quantitative easing and the British economy are responding as I expected it would – with the mixed indicators on inflation."

British consumer price inflation rose for the first time in six months in March, increasing to 3.5 per cent from 3.4 per cent, in contrast to Bank of England forecasts in February that it would fall steadily this year below its 2-per-cent target.

After the data came out Tuesday, Mr. Posen told reporters that the Bank of England would have to rethink its approach if there was no fall in core inflation, which excludes volatile food and energy prices. He reiterated this point on Thursday.

Mr. Posen also said he stood by his promise in March last year not to seek another three-year term on the Bank of England Monetary Policy Committee if his inflation analysis proved to be wrong – though he said he should not be held to a forecast of 1.5-per-cent inflation for summer 2012.

"That was when some (Monetary Policy Committee) members were voting to tighten policy and no one else was voting for additional ease. Of course, the inflation forecast is higher now than it was then precisely because, rightly, we did more quantitative easing," he said.

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"What is more challenging to my analysis, and more concerning for the economy, is that core inflation has plateaued for the last three months rather than trending down."

Mr. Posen's term on the committee ends in August, and in March he said that he would decide this month whether or not to seek another term.

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