LONDON (Reuters) - More action and a disciplined approach is needed on central bank monetary policy, government fiscal policy and bank regulation, Bank of England monetary policy committee member Tim Besley said on Tuesday.
The BoE had a particular challenge in ensuring that its target of 2 percent inflation remained credible as falling demand and commodity prices raised the spectre of deflation — though sterling’s weakness helped to mitigate the risk, he said.
“The role of monetary policy in an episode like this one is to ... guard against deflationary risks. (But) it is important to be realistic about the role that monetary policy can play in that respect,” he said at the London School of Economics.
“The world is now in the grips of a major economic downturn. It is impossible to know how protracted or severe this will be.”
The BoE’s quarterly Inflation Report last week forecast that inflation would be just 0.5 percent in two years time, and the International Monetary Fund has said that Britain will suffer the sharpest downturn of any big economy this year.
Besley warned that fiscal prudence should not be abandoned in governments’ efforts to mute the impact of the downturn.
“In the conduct of both monetary and fiscal policy, there is a need to maintain a disciplined approach. Debt is only deferred taxation and that the challenge is to provide a time path for fiscal policy that is sustainable over the medium term.”
Besley was circumspect about future BoE policy moves now that rates are at a record low of 1 percent, in contrast to BoE Governor Mervyn King and Deputy Governor Charles Bean who have said a new policy of quantitative easing is possible as rates approach zero.
“You’re going to hear a lot about what the bank’s thinking. We’re having a number of discussions. What the Governor said at the Inflation Report press conference made clear that this is a direction of debate,” he said in response to a question on quantitative easing after the speech.
He said that it was also important that policy responses remain focussed on long-term goals. “There is an underlying need for a period of economic adjustment,” he said.
Besley said financial regulators needed to pay more attention to economic research into market failure, noting that the adverse selection problems posed by securitisation were clear in theory long before they showed up in practice.
“It is clear that in all three policy domains there is unfinished business,” he said, referring to monetary, fiscal and regulatory policy.
Reporting by David Milliken; Editing by Sumeet Desai and Tom Hals