The Bank of England should instigate a second round of quantitative easing, according to Monetary Policy Committee member Adam Posen.
Speaking to the Hull and Humber Chamber of Commerce in Hull this afternoon, Posen said policy makers faced an “uphill battle” in steering economies towards a sustained recovery and as such have to take aggressive policies to avoid making low growth the norm.
He said: “Monetary policy should continue to be aggressive about promoting recovery, and, subject to further debate, I think further easing should be undertaken.
“The risks that I believe we face now are the far more serious ones of sustained low growth turning into a self-fulfilling prophecy, and/or inducing a political reaction that could undermine our long-run stability and prosperity.
“Inaction by central banks could ratify decisions both by businesses to lastingly shrink the economy’s productive capacity, and by investors to avoid risk and prefer cash. Those tendencies are already present, and insufficient monetary response is likely to worsen them.”
Posen said it would be preferable for the Bank to buy up private debt in another round of QE rather than UK debt, which was bought in the initial £200bn easing programme.
Posen argued that if the last injection of stimulus had worked, the UK would be in recovery mode by now. As such, he said that lessons must be taken from the Great Depression and the Japanese Lost Decade, where high unemployment and output gaps were the threat, not inflation.
He said: “The case for doing more is about activism for sustaining a period of recovery from a low point, thereby preventing us from getting stuck in a long-term trap. The longer that growth remains below potential and that output gaps persist, the more lasting damage is done to our economic potential and to our citizens.”
Posen stressed that his call for more easing had no bearing on his vote in next month’s MPC meeting.
Barclays Capital analyst Simon Hayes says Posen was reportedly picked by the Treasury to sit on the MPC for his knowledge of Japan’s sustained periods of low growth. He says: “It is perhaps surprising that only now has he been moved to articulate fully the dangers he believes the UK faces – a fact that he himself put down to his own concerns that his reading of the situation might have been wrong and that the economy could experience a ’normal’ recovery. He is increasingly convinced that this is not the case.”