Bank stimulus depends on credibility, reminds MPC’s Tucker

It is essential that the Bank of England’s monetary policy safeguards the institution’s credibility as a fighter of inflation, according to Monetary Policy Committee (MPC) member Paul Tucker.

The comments by Paul Tucker, a governor at the Bank, echo the recent sentiment of Mario Draghi, the governor of the European Central Bank (ECB).

Tucker told a meeting of financiers in London that the Bank’s ability to support the UK economy through monetary policy depends on it maintaining its reputation as an inflation-fighter.

“Our ability to provide and sustain that stimulus depends absolutely on the credibility of our commitment to the 2% inflation target,” the governor says.

“If our credibility were to slip and medium-term inflation expectations were to rise, we would have to run with a tighter monetary stance than otherwise in order to put the genie back into the bottle.”

Tucker also claims the MPC’s view that inflation will fall sharply from the start of 2012 – which he labels as its “most important judgement call” – will be put to the test over the coming few quarters.

“We will all discover whether inflation declines rapidly from 5% towards 3% as the effects of the price level shocks wane,” he says.

Speaking at the European Banking Conference in Frankfurt last week, Draghi reminded delegates that the ECB’s main role remains tackling inflation, not becoming a lender of last resort to fight the eurozone debt crisis.

“Gaining credibility is a long and laborious process. Maintaining it is a permanent challenge. But losing credibility can happen quickly,” the governor warned.

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