Bank of England policymaker Adam Posen will not seek a second term on the Monetary Policy Committee if his persistent lone call for more quantitative easing proves to have been a mistake. In an interview with the Guardian newspaper published on Monday, Posen said he was still convinced that a looming slump in inflation would vindicate his call since October for an extra 50 billion pounds to be pumped into the economy.
-- Inflation to tumble to 1.5 percent by middle of 2012
"If I have made the wrong call, not only will I switch my vote, I would not pursue a second term. They should have somebody who gets it right and not me. I am accountable for my performance. I'm holding my nerve because it is the right thing to do," he said. Inflation has been more than double the BoE's 2 percent target so far this year, and the balance of argument on the nine-member MPC is shifting away from Posen, with three members voting for a rate rise in both February and March's meetings.
Nomura economist Peter Westaway, who used to work at the BoE, said he was shocked by Posen's statement. "That's unprecedented in my experience. Not even David Blanchflower threatened to step down," he said, referring to a dovish predecessor of Posen who had a jaundiced relationship with other members of the MPC. Posen's three-year term on the MPC expires at the end of August 2012, but can be renewed once.
One print edition of the Guardian carried the headline "Bank of England dove predicts 1.5 percent inflation - or he'll quit", though Posen's direct quotes in the article tied his departure to the appropriateness of QE rather than a specific inflation forecast. Posen does expect inflation to fall to 1.5 percent by the middle of next year, a bigger fall than that expected by most of the rest of the council. The BoE's February inflation report shows a roughly one in three chance of inflation being 1.5 percent or lower in the second half of 2012.
The central forecast was for inflation to peak at around 4.5 percent in the third quarter of this year, before falling steadily to return to its 2 percent target 12 months later. Westaway said that he forecast inflation dropping as low as 1.6 percent in November 2012, and that 1.5 percent inflation was not an unreasonable forecast either - though he believed it would rise soon thereafter.
British financial markets did not move after Posen's comments, with short sterling futures in fact pricing in a marginally faster pace of rate-tightening than on Friday. "It's a slightly melodramatic statement by Adam," Westaway said. "He's always been one who enjoys debate, and now feels as if the debate is shifting towards the ones who are wanting to raise interest rates." Posen disputed the view of those calling for higher interest rates that wage rises were likely to put upward pressure on inflation next year.
"Wages will be the dog that doesn't bark," he said. Reiterating his commitment to more QE, he said: "I have laid awake at night thinking about it."
"It would not just be terrible that I had messed up for other people but it is also my fundamental world view that I have been testing." Posen's call for more QE finds little support from most other economists. "He thinks the consumer is under extreme pressure, and we've some sympathy with this," said Royal Bank of Scotland economist Ross Walker. "I'm personally not sympathetic to more QE. Even if we knew that inflation was going to be 1.5 percent, it's not a dramatic undershoot."
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