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MNI INTERVIEW: BOE Hold Weakens Target Symmetry: Blanchflower

By Pedro Nicolaci da Costa
     WASHINGTON(MNI) - The Bank of England had enough evidence of slowing
economic activity to have cut interest rates at its meeting on Thursday, and by
failing to do so undermined its symmetrical inflation target, former BoE Member
David Blanchflower told MNI.
     The BOE's Monetary Policy Committee, meeting on the eve of Britain's exit
from the European Union, kept interest rates steady at 0.5% by a 7-2 margin.
     "Inflation is at 1.3%, it's forecast to stay below target for a long time,
growth is going to be 1%--and they did nothing," Blanchflower, now a professor
at Dartmouth College, told MNI in an interview.
     "They're supposed to have a symmetric target--but what would they be saying
if inflation were 0.7 percentage point above rather than below it?"
     Officials appear to be "sitting and waiting for some bad data to show up by
which time it's too late," he said.
     Blanchflower said central bankers, including the Federal Reserve, have been
insufficiently aggressive about easing monetary policy in order to meet their
inflation targets.
     The Fed raised interest rates fairly aggressively in 2018 on unfounded
fears that inflation might be around the corner, only to have to cut them again
in 2019. The Fed also held rates steady this week, although its balance sheet
has been expanding rapidly in response to liquidity problems in the repo market.
     Central bank policymakers' persistent hesitancy to use the tools at their
disposal at least somewhat preemptively could make such instruments less
effective--and also create market volatility by making reactions more knee-jerk
and potentially more aggressive, Blanchflower said.
     "The question is what happens when bad data comes along," he said.
     "The danger is we're going to be faced with much more volatility in the
markets when people know they should bail" but at the same time expect cover
from central bank interventions that were driven by market events rather than
longer-term economic developments.
     The Fed already appears stuck in that trap to a certain extent, with
investors actively debating how much its recent interventions in short-term
money markets have helped boost stock prices to new records.
--MNI London Bureau; +44 203 865 3829; email:
[TOPICS: M$B$$$,M$E$$$,MT$$$$,MX$$$$,M$$BE$]

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