By Simon Miller

Bank of England monetary policy committee member David Miles has defended the bank’s loose monetary policy in a speech today.

Speaking to economists, Miles said he believed there was a case for making monetary policy more expansionary even with inflation remaining on the upside.

He said that the evidence suggested that there was currently lots of spare capacity in the UK but the degree of slack may not be that great.
Miles added that while the path of inflation was, at present, a reflection of cost pressures not really affected by UK spare capacity, inflation inertia does suggest that the degree of slack may be having less of an impact than usual, a phenomenon that he suggests could be linked to the disruption of credit.

As a result, it meant that the so-called Phillips curve – which shows the link between slack and inflation pressures – is flatter than had seemed likely.

“My own view is that rather than interpret the recent slightly greater inertia in inflation as simply reflecting much less slack in the economy I would ascribe a significant part to a smaller downward impact of a given amount of slack on inflation pressures," he said.

Miles continued: "If spare capacity does have a weaker impact on domestically generated inflation pressures it changes the costs and benefits of bringing inflation back to target faster or slower...In a situation where weak demand is likely to be having a negative impact upon productive capacity the cost of having a tighter monetary policy to bring inflation back to target fast will be some long lasting damage to incomes."

He concluded that the existence of significant slack, a flatter Phillips curve and a high degree of dependence of productive potential upon demand are all likely.

Miles added: “I believe they are consistent with the evidence and that they make an exceptionally expansionary monetary policy appropriate. No one on the MPC feels comfortable with the prolonged and substantial overshoot of inflation above its target level. But that does not mean bringing inflation back to target very rapidly is the best thing to do.”

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