"My preferred path for policy would be to keep the current monetary stimulus in place until well into 2023 or 2024, long enough to judge whether economic slack has indeed been eliminated fully"
Gertjan Vlieghe, external member of the Monetary Policy Committee, estimates that the "removal of monetary stimulus is unlikely to become appropriate until well into 2022".
During a speech at Durham University, Vlieghe said that if the economy evolves broadly in line with the MPC's February projection, "it is likely that no further monetary stimulus is required".
He added that there is "no hurry at all to remove stimulus" given that, immediately before the pandemic, Bank Rate was just 0.75% and "we were discussing whether it should be cut because inflation pressures were a little too weak".
Vlieghe continued: "My preferred path for policy would be to keep the current monetary stimulus in place until well into 2023 or 2024, long enough to judge whether economic slack has indeed been eliminated fully, and inflation has returned to target sustainably, rather than being pushed up by temporary factors."
If the economy recovers more strongly than expected, Vlieghe says he would "want to judge whether that excess demand is persistent or not, so I would favour not responding to the first signs of it". He said it is "perfectly possible" to have a short period of pent up demand, after which demand eases back again.
He added: "In my judgement it would be a policy error to respond to such circumstances with early monetary tightening. Tightening too soon would be a worse mistake than tightening too late, given that monetary policy space for easing is limited. So even if the economy recovers more strongly than in our central projection, I think removal of monetary stimulus is unlikely to become appropriate until well into 2022. Such a strong economic scenario would be a nice problem for the MPC to have. We have all the policy space we need in order to tighten monetary policy. And given low neutral interest rates, is likely we would not have to tighten all that much."
However, given the possibility of a weaker scenario, he said: "I would favour a negative Bank Rate as the tool to implement the stimulus. The time to implement it would be whenever the data, or the balance of risks around it, suggest that the recovery is falling short of fully eliminating economic slack, which might be later this year or into next year. After the further boost delivered by negative rates to eliminate slack, interest rates can begin to return to positive."