According to the newest member of the Bank of England’s Monetary Policy Committee (MPC), the Bank’s quantitative easing programme (QE) is no longer as effective as it was and could have “inflationary consequences” if extended.
Mr McCafferty, who joined the MCP in September, said in his first speech on Friday that confidence on the asset purchases tool, otherwise called quantitative easing, was at its strongest when it was first introduced.
However, he added, the novelty of the instrument and the MPC’s readiness to act quickly to loosen policy further at a time of ultra-low interest rates no doubt acted to lift “animal spirits”, while the effect has become weaker as QE has become part of the policy landscape.
So far, the Bank has bought £375bn of Government bonds but Mr McCafferty has voted with the majority on the Committee to leave this amount unchanged since he joined.
Despite his views on the weakening of the effectiveness of QE, McCafferty said that there are other avenues for the Bank to take in a bid to stimulate the economy.
He said that policies targeted at specific bottlenecks in the economy, such as small business-lending, may be needed, while targeting growth, as measured in gross domestic product without adjusting for changes in prices, or nominal GDP, could also be considered.
In this opinion, he concurs with incoming BOE Governor Mark Carney, who takes over from Sir Mervyn King in July. Mr McCafferty added that there are significant shortcomings to nominal GDP-targeting and that pursuing such a policy should be a temporary measure only.
Mr McCafferty went on to say that he expects the annual rate of inflation to return to the Bank’s target of 2 per cent slowly over the next two years, with its decline frustrated by wage pressures and high commodity prices.