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Billions of pounds of QE unlikely to cause inflation - IMF
Central banks can unleash billions of pounds more quantitative easing with little threat of stoking inflation, according to analysis by the International Monetary Fund.
IMF chief Christine Lagarde has welcomed Japan's massive new money priting programme.
By Philip Aldrick, Economics Editor
2:30PM BST 09 Apr 2013
59 Comments
Work by economists at the Washington-based institution found the historic link between unemployment and inflation has weakened “over the past several decades” and that even a sharp fall in joblessness would not lead to spiralling price rises.
“Looking to the future, our analysis suggests that ongoing monetary accommodation is unlikely to have significant inflationary consequences, as long as inflation expectations remain anchored. In this regard, preserving central banks’ independence is key,” the IMF said in a pre-released chapter of next week’s World Economic Outlook.
“Indeed ... any temporary over-stimulation of the economy – perhaps stemming from misperception about the size of output gaps – is likely to have only small effects on inflation.”
The findings will be welcomed by the Chancellor, who is pinning his hopes for growth on the incoming Bank of England Governor Mark Carney. Mr Carney has indicated he is willing to take radical action to revive growth in the UK.
The Bank has already injected £375bn into the economy through QE, the largest monetary stimulus of any developed country as a proportion of GDP. Sir Mervyn King, the outgoing Governor, has called for another £25bn for the last two months – but has been outvoted by his fellow policymakers.
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It also follows comments by IMF managing director Christine Lagarde over the weekend, when she described Japan's massive new money priting programme as "a welcome step". However, she warned there was "a limit to how effectively monetary policy can continue to shoulder the lion’s share of this effort".
The IMF based its analysis on the relationship between unemployment and inflation. Orthodox economics teaches that falling unemployment can cause rising inflation, as well as the inverse. However, the IMF said “the relationship between inflation and unemployment is much more muted” and that the main driver of inflation was now “long-term [inflation] expectations”.
As a result, it said the key to keeping inflation under control was central bank independence and a commitment to price stability. “The greatest risk for inflation, just as in the 1970s, is the possibility that expectations will become disanchored,” the IMF said.
“In short, the dog did not bark because the combination of anchored expectations and credible central banks has made inflation move much more slowly than caricatures from the 1970s might suggest – inflation has been muzzled. And, provided central banks remain free to respond appropriately, the dog is likely to remain so.”
However, the IMF warned against complacency as excessive monetary stimulus may cause other inflationary bubbles that don’t show up in the consumer prices index, such as the housing boom of the last decade.
“These housing bubbles helped destabilise the global financial system and contributed to the subsequent recession. Therefore, low consumer price inflation does not necessarily equate with a lack of economic imbalances. Policymakers must be alert to signs of growing imbalances and respond with appropriate policies,” the IMF said.
Political pressure for loose monetary policy could also stoke inflation if it caused markets to lose faith in central bank independence. “The US and German experiences in the 1970s should serve as an important reminder about the inflation risks arising from political pressure and limited central bank independence,” the IMF said.
“History clearly demonstrates the risks associated with curtailing appropriate monetary tightening in response to persistently rising inflation. The end result can be the disanchoring of inflation expectations and stagflation.”
The IMF also warned there was a risk that the relationship between unemployment and inflation was no longer understood. While the response to rising unemployment may be “muted” inflation, the researchers said it may be wrong to extrapolate the same reaction to a fall in unemployment. That could lead to a “steep” rise in the inflation curve.
Central banks can unleash billions of pounds more quantitative easing with little threat of stoking inflation, according to analysis by the International Monetary Fund.
IMF chief Christine Lagarde has welcomed Japan's massive new money priting programme. By Philip Aldrick, Economics Editor
2:30PM BST 09 Apr 2013
59 Comments Work by economists at the Washington-based institution found the historic link between unemployment and inflation has weakened “over the past several decades” and that even a sharp fall in joblessness would not lead to spiralling price rises.
“Looking to the future, our analysis suggests that ongoing monetary accommodation is unlikely to have significant inflationary consequences, as long as inflation expectations remain anchored. In this regard, preserving central banks’ independence is key,” the IMF said in a pre-released chapter of next week’s World Economic Outlook.
“Indeed ... any temporary over-stimulation of the economy – perhaps stemming from misperception about the size of output gaps – is likely to have only small effects on inflation.”
The findings will be welcomed by the Chancellor, who is pinning his hopes for growth on the incoming Bank of England Governor Mark Carney. Mr Carney has indicated he is willing to take radical action to revive growth in the UK.
The Bank has already injected £375bn into the economy through QE, the largest monetary stimulus of any developed country as a proportion of GDP. Sir Mervyn King, the outgoing Governor, has called for another £25bn for the last two months – but has been outvoted by his fellow policymakers.
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07 Apr 2013
It also follows comments by IMF managing director Christine Lagarde over the weekend, when she described Japan's massive new money priting programme as "a welcome step". However, she warned there was "a limit to how effectively monetary policy can continue to shoulder the lion’s share of this effort".
The IMF based its analysis on the relationship between unemployment and inflation. Orthodox economics teaches that falling unemployment can cause rising inflation, as well as the inverse. However, the IMF said “the relationship between inflation and unemployment is much more muted” and that the main driver of inflation was now “long-term [inflation] expectations”.
As a result, it said the key to keeping inflation under control was central bank independence and a commitment to price stability. “The greatest risk for inflation, just as in the 1970s, is the possibility that expectations will become disanchored,” the IMF said.
“In short, the dog did not bark because the combination of anchored expectations and credible central banks has made inflation move much more slowly than caricatures from the 1970s might suggest – inflation has been muzzled. And, provided central banks remain free to respond appropriately, the dog is likely to remain so.”
However, the IMF warned against complacency as excessive monetary stimulus may cause other inflationary bubbles that don’t show up in the consumer prices index, such as the housing boom of the last decade.
“These housing bubbles helped destabilise the global financial system and contributed to the subsequent recession. Therefore, low consumer price inflation does not necessarily equate with a lack of economic imbalances. Policymakers must be alert to signs of growing imbalances and respond with appropriate policies,” the IMF said.
Political pressure for loose monetary policy could also stoke inflation if it caused markets to lose faith in central bank independence. “The US and German experiences in the 1970s should serve as an important reminder about the inflation risks arising from political pressure and limited central bank independence,” the IMF said.
“History clearly demonstrates the risks associated with curtailing appropriate monetary tightening in response to persistently rising inflation. The end result can be the disanchoring of inflation expectations and stagflation.”
The IMF also warned there was a risk that the relationship between unemployment and inflation was no longer understood. While the response to rising unemployment may be “muted” inflation, the researchers said it may be wrong to extrapolate the same reaction to a fall in unemployment. That could lead to a “steep” rise in the inflation curve.