MNI POLICY: BOE Cunliffe: Easing Case If Covid-19 Global Shock

By David Robinson

     LONDON (MNI) - Bank of England Deputy Governor Jon Cunliffe said the UK was

facing weak domestic inflation pressure and that there was a "risk management"

case for easing policy if the coronavirus turned into a global shock.

     In remarks at a Barclays event Cunliffe said the Monetary Policy Committee

was exploring the reasons behind the weakness of domestically generated

inflation. On the headline news of the spread of coronavirus, he said there was

nothing monetary policy could do to help on the supply side but that there was a

case for action if it turned into a global shock.

     The following are points made by Cunliffe:

     --On the coronavirus he said that if it was entirely a negative supply

shock monetary policy could not offset it but "You won't know whether it is

supply or demand for some time."

     He made the case for easing if it did develop into a global shock.

     "Were we to face global headwind shocks there is a risk management argument

in using monetary policy," he said.

     --Alongside conventional monetary policy support, Cunliffe also argued that

fiscal policy had room for manoeuvre without having to resort to helicopter

money.

     "I think there is space for conventional fiscal policy without bringing in

the helicopters," he said.

     "I do think we need to revisit our benchmarks for fiscal sustainability in

light of the low interest rate environment."

     --He highlighted the difficulty facing the MPC of having soft domestically

generated inflation and ultra-low interest rates along the yield curve.

     "From a UK perspective, the challenge we have at present is weak

domestically generated inflation .. and the question is, is that cyclical (or

structural)," he said.

     He said that there were a number of candidates to explain the weakness. A

benign one is that the increase in wages from low unemployment has been lagged,

and will feed through.

     A second explanation is that it may be partly explained by changes in the

retail sector, the "Amazonification" of retail, with low cost newcomers

squeezing margins.

     "It may be very difficult for firms to increase prices which suggests that

we are going to get a trend decline in margins and profitability," he said.

     --Cunliffe noted that real interest rates are low at all time horizons and

while "some of that is almost certainly structural" he said that part of it was

due to market pessimism.

     "There is entrenched pessimism in there which could be to do with policy

uncertainty, fears of de-integration of the global economy and the impact that

that is having on investment," Cunliffe said, as well as concerns over

persistently weak productivity growth.

     The exceptionally low yield curves mean policy will come up against the

effective lower bound, the reversal rate, more often than in the past, he said.

--MNI London Bureau; tel: +44 203-586-2223; email: david.robinson@marketnews.com

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