In a speech given today, Adam Posen outlined the reasons why he believes that stagflation is unlikely and the Bank of England should therefore keep interest rates on hold.
His views were in stark contrast to the BIS’s annual report, published today, which warned that low interest rates across the globe are a threat to world financial stability.
The report says: “The prolonged period of very low interest rates entails the risk of creating serious financial distortions, misallocations of resources and delay in the necessary deleveraging in those advanced countries most affected by the crisis.”
But Posen says that independent central banks have a tendency to err on the pre-emptive deterrent side and while some central banks should raise rates as their conditions demand, the UK should not.
This is because there is little or no credit growth in the UK, little wage growth beyond productivity, little evidence of rising inflation expectations and oil prices are not yet a one-way bet.
Posen adds that there is little risk of stagflation because we are in an economic situation in the UK today where monetary policy anchors inflation expectations, workers have limited bargaining power over wages, oil prices are not obviously accelerating one way and trend productivity growth is largely undiminished.