UK Monetary Policy Committee member Tim Besley yesterday signalled opposition to deep or fast cuts in UK interest rates, dismissing as "mistaken" any notion that he and his colleagues should set rates to protect people's living standards from economic shocks.
Besley, a part-time, external member of the nine-strong Bank of England committee, hammered home his view that the MPC must stay focused on targeting benchmark annual UK consumer prices index inflation of 2% on a two-year horizon.
He also indicated that the Bank's announcement on Monday - that it would allow commercial banks to swap effectively untradeable mortgage-backed securities for Treasury bills - made further cuts in interest rates less pressing because this exercise targeted specifically the global credit crunch.
The Bank put a £50bn initial estimate on the amount it would lend to commercial banks through this scheme, but Governor Mervyn King emphasised this was not an arbitrary upper limit, and some see the total going to £100bn.
Besley said yesterday: "Among the reasons that I welcome the initiative announced by the Bank of England is that it is targeted directly at alleviating a key stress that has followed from the current disruption in financial markets. This should allow the MPC to stay more focused on its task of using monetary policy to target inflation."
He highlighted the importance of household access to mortgage finance, in mulling the "far-reaching implications" of the financial market disruption triggered last summer by massive default on US sub-prime mortgages.
Besley's tone yesterday, in a speech to the Canada-UK Chamber of Commerce in London, appeared much more hawkish than when he addressed the Institute for Fiscal Studies in February.
At the IFS, he had seemed more amenable to rate cuts by focusing on the significant hit which the reduced availability of credit to households could have on consumption growth.
Besley, contrasting the benign period since the early 1990s with the "Great Inflation" of the 1970s and part of the 1980s, told his audience yesterday: "During the period of low and stable inflation, monetary policy in the UK has been focused on the control of inflation But, having been so successful in achieving this end, there is a danger that monetary policy will be asked to do more."
He added: "In particular, monetary policy-makers may be expected to protect the economy against persistent real shocks in the mistaken view that adjustments in real living standards can be avoided. This is an important issue in the UK at the present time when the economy is going through a period of rebalancing away from consumption and towards closing our current account deficit.
"At the same time, we are adjusting to the real implications of the credit shock. Monetary policy can perhaps smooth some of the adjustment in response to changes in the real economy. However, in my view it cannot, and should not, therefore, try to prevent warranted real economy changes taking place."
Besley's comments follow remarks this month from Prime Minister Gordon Brown about the UK's ability to cut base rates because its inflation rate is lower than in some other countries.
Two days before the MPC's quarter-point cut in UK base rates to 5% on April 10, Brown told the BBC: "Because we've got low inflation, we can cut interest rates."
The MPC has cut base rates by a quarter-point three times so far this cycle, with the other moves coming in December and February.
The US Federal Reserve has instigated much deeper cuts. It has slashed its benchmark Fed funds rate from 5.25% last September to 2.25%.
Besley, defending the MPC's stance, said: "There are challenges faced by the pressures that come from the similarities and differences in the policy stances of central banks around the world The experience of the Great Inflation' of the 1970s, as well as of the current credit crunch, makes me only too aware of real-time yardstick competition when strategies are being compared around the world.
"But, in the face of this, it is important to remain focused on implementing the policy that is needed based on circumstances here in the UK."
Besley noted the high and volatile inflation in the 1970s and part of the 1980s was associated with negative real interest rates, subtracting inflation from the nominal policy rate, in most of the major economies.
He observed that the most recent period of low and stable inflation was characterised by "positive and higher real rates of interest". Besley added: "This observation is consistent with what sometimes is called the Taylor principle: the notion that, in response to inflationary pressures, a central bank that wishes to maintain control over inflation needs to raise the nominal interest rate enough to generate a positive real rate. The fact that the central bank is expected to conform to the Taylor principle contributes to managing the demand side of the economy and keeps inflation expectations anchored around low inflation."
He appeared to underline his view that a series of small changes in interest rates was much better, from the viewpoint of keeping inflation expectations anchored, than more dramatic moves.
Besley told his audience: "The experience of recent years suggests that, once credibility is established, inflation can be kept under control through sequences of small changes of the policy rate in the same direction."
