Thursday, February 01, 2007
Tim Besley frets about the UK inflation psyche
Posted by David Smith at 09:30 AM
Category: Thoughts and responses


In his first interview since joining the Bank of England's monetary policy committee, Tim Besley is concerned that inflation may still be ingrained in the British psyche. He also says the rise in inflation to 3% played no part in his decision to vote for the January rate hike. Here's the FT piece:

Inflationary pressures may be more ingrained in the British psyche than commonly thought. As Tim Besley prepares for next week’s meeting of the monetary policy committee, that thought is uppermost in his mind.

In his first newspaper interview since joining the MPC in September, Mr Besley, a part-time professor at the London School of Economics, says he is devoting much of his efforts to deciding how far rising inflation has reflected a pervasive imbalance between demand and potential supply rather than one-off factors such as energy price increases.

Asked if this meant inflation would be “sticky” on the way down and not fall as quickly as the Bank expects, he conceded: “It’s a concern.” Why did Mr Besley join the slim majority who backed last month’s rate rise to 5.25 per cent? He cites “a drip-feed” of information since the end of November, specifically the resilience of the US economy, the ability of producers to push through price increases and robust economic growth.

“For me, that added up to sufficient evidence that we really ought to get ahead of the curve and to put through a further rate increase rather than waiting, perhaps, until further down the line when we might have to put up rates even more to secure the same amount of impact,” he says.

He stresses the rise in CPI inflation to an annual 3 per cent in December from November’s 2.7 per cent played no part in his decision. While he recognises the decision surprised financial markets, he makes clear that the possibility of such an upset will not deter him from voting for change once his mind was made up.

“Other things being equal, I clearly would be in the camp of not wanting to surprise the markets ... the trade-off is between feeling you’ve made the right decision based on the data.”

But he is careful not to prejudge the Bank’s quarterly inflation forecast which will inform next week’s interest rate decision. With three votes for rises in his first five meetings, Mr Besley has been described as a “super-hawk” and “card-carrying monetarist” – terms he rejects.

“I could imagine joining the committee under entirely different circumstances where my voting record ... would be looking entirely different,” he says, and adds: “I’m not of a view that somehow we should be returning to a regime of monetary targeting.”

But he makes clear he is willing to take tough decisions, occasionally against the prevailing wisdom of markets and commentators. “Once in a while it may be justified if you feel that there’s sufficient reason to get on with the decision based on the analysis you have about the inflation risks in the economy.”

In this vein he says he remains “very comfortable” with his vote to raise rates in January. Where Mr Besley is less at ease – causing him to be more concerned about inflationary pressure in the economy than some others on the committee – is with the intellectual underpinning of the Bank of England’s model.

The model, like all others of its type, has an inbuilt mechanism predicting stability in the economy. It assumes that people believe the Bank will deliver the 2 per cent inflation target, so they behave as if inflation will revert to target – and it does so.

It is not that Mr Besley thinks the monetary policy framework is wrong or lacks credibility. But he says: “The key part of that framework which I’m less sanguine about is our understanding of the formation and consequences of inflationary expectations.”

He thinks inflationary expectations probably depend to some extent on the growth of money, asset prices and credit. That is why he concentrates on these nominal variables, insisting they are mentioned in the minutes of meetings. “Expectations are driven by a view about the nominal side of the economy,” he says, adding: “What’s going on in asset markets may be something that influences people’s perception of the nominal side of the economy; after all, they’re observing on one side of the economy very significant rises in particular prices.”


Dear David,

Delighted to hear Mr besley contributions, I was in need to hear someone mention the importance of economic fundamentals and stand by them.

best wishes

Arik Schickendantz

Posted by: Arik Schickendantz at February 1, 2007 03:27 PM

Too much emphasis is being placed on the increase in house prices which is being driven by London and a few other hot spots. The reality is that for most of the uk rises are modest at best. Economists should also be wary of house price forecasts made by mortgage lenders as they have a vested interest in keeping the market 'on the boil' - I know I worked for one!

Posted by: peter savage at February 11, 2007 07:01 PM