MPC's Charlie Bean reiterates the need for loose monetary policy

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Charlie Bean, deputy governor of the Bank of England, gave a speech earlier today in which he laid out “why the [Monetary Policy] Committee's view of the outlook has shifted so dramatically” compared with earlier in the year, when the recovery seemed to be broadly on track.

Bean is at pains to point out that slowing growth not confined to the UK. Growth in the Eurozone still appears to be weakening, and recent signs of improvement in the US are still vulnerable to domestic and global events. Even emerging economies are slowing as a result of policy designed to avoid over-heating.

Bean believes there are two key reasons for slowing growth:

  1. Heightened tension in financial and bank funding markets associated with the twin euro-area banking and sovereign debt crises, which has damaged confidence and caused businesses to hold back on investment. (see our blog on why what happens in Europe matters)
  2. The substantial rise in energy and commodity prices during the latter part of 2010/early 2011 which has added to the squeeze consumers were already facing on their incomes.

Despite the fact that inflation has hit household spending – and therefore contributed to lower growth – Bean thinks that the outlook for weaker UK growth in the next couple of years means that the level of inflation will undershoot its target in the medium term without monetary intervention.

The Bank releases its quarterly inflation report on the 17th November, this will be a chance to see a little more on how their forecasts have changed. But one thing is clear: next Thursday's announcement on the MPC's latest decision is likely to reiterate the ongoing need for loose monetary polucy.

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