LONDON, Sept 24 (Reuters) - A top Bank of England policymaker said critics of the central bank’s new forward guidance strategy were resorting to “Alice in Wonderland” logic by saying it had been a failure.
David Miles also said he was more confident about Britain’s recovery prospects than at any time since he joined the Bank in 2009, but that people should not expect a quick return to more normal monetary policy given how weak the economy has been.
Last month, the BoE announced a new strategy of linking its record low interest rates to a fall in unemployment in order to guide Britain back to growth.
The announcement coincided with signs that the long-awaited recovery was picking up speed. That led to a rise in interest rates and sterling and prompted criticism from some economists and media that the guidance was a failure because the BoE might have to raise rates before late 2016, as suggested by the plan.
Miles said the tightening of financial conditions since August, while not helpful, was “benign” because it reflected Britain’s better economic prospects, and he rejected the criticism as a “rather Alice in Wonderland, upside down logic”.
“It implies that somehow the MPC find unwelcome signs of a recovery in the economy. I can assure you that we do not!” he said in a speech to be delivered at Northumbria University in Newcastle, northeastern England.
He said the market’s apparent view that unemployment might fall to the BoE’s threshold level of 7 percent in the next 18 months was “rather sooner than I think is likely”.
Miles was the most persistent proponent on the Bank’s Monetary Policy Committee for more bond-buying stimulus. But he has not voted for more quantitative easing since July as the Bank launched its guidance plan and signs of a recovery grew.
He said in his speech that there was a risk that Britain’s recovery might not prove durable and, in any case, it still had a long way to go before monetary policy could get back to normal given how weak the economy had been since the financial crisis.
Miles said guidance was helpful at this stage because it reduced the risk of a “still somewhat embryonic” recovery being smothered by expectations of imminent monetary policy tightening.
He also said he thought it was plausible that Britain could have economic growth back at average levels or stronger for the next six to eight quarters while unemployment did not fall much.