Any quotes used must be attributed to Murnaghan, Sky News 

DERMOT MURNAGHAN:

Three years after the banking crash that led Britain into recession, the recovery now seems far from certain with economic growth flat-lining but as inflation accelerated to 4.5% this week, can we afford another round of quantitative easing to stimulate growth and the economy?  In a moment I’ll be speaking to the Bank of England’s Adam Posen about that but first to let you know, watching our discussions today are today’s Twitter experts, they are Mark Littlewood, Director General of the Institute of Economic Affairs, we’ve got Kevin Schofield, political correspondent at the Sun and Sam Coates, deputy political editor at the Times.  They provide their reactions via Twitter, you can read those on the side panels if you are watching in HD, you can follow as well on our website skynews.com/politics and of course feel free to join in using the hashtag #murnaghan.  Well let’s talk then to Adam Posen, the MPC committee member joins us from Westminster, a very good morning to you Mr Posen.  I mean with growth slowing, as I said there, at its fastest rate for over a year, the austerity measures beginning to bite, inflation kicking up even further, how great do you assess the risks to the economy to be?

ADAM POSEN:

I think they’re pretty grim I’m afraid.  This has been a pattern that happens any time you are coming out of a financial crisis, if you are going to do austerity which maybe we do have to do, then it is just going to put further downward pressure on things and we’re sitting on a situation – you mentioned inflation peaking up but it’s about to peak and come down which is  a good thing but it removes any reason to hesitate about doing more.

DERMOT MURNAGHAN:

Are you sure though about inflation because we’ve heard that message from the Bank of England many times before, that it’s about to peak and then come down and it just seems to have moved relentlessly upwards?

ADAM POSEN:

I don't think that’s quite right but I’m only speaking for myself and not for the Bank, I’m one member of nine on the committee but I’ve been saying since fall last year that it would peak some time in fall this year and I’ve been saying that it would come down by summer 2012 and we’re on track for that.  The Ofgem let the energy people charge everybody too much and that’s what we’re seeing right now, everything else is quiescent – wages are not growing, export prices have stopped rising because the pound has been stable so I don’t really see the inflation threat.  If inflation were to get bad it’s pretty easy for us to take it down but these temporary moves on inflation, while they are real for British households, they are not a good forecast for what we have to do for the economy as a whole.

DERMOT MURNAGHAN:

Okay, a bigger risk in terms of growth.  What is left in the MPC and the Bank of England’s locker to use here to stimulate growth given that interest rates have been so low for so long?

ADAM POSEN:

We’re not going to be moving interest rates, at least I don't think we are, there’s not much room to go there. There are I think two ways we can do more, one is to do additional quantitative easing which I know is a term that gets people riled up but it just means buying government securities on the open market and thereby making riskier assets seem more attractive, creating a little bit of wealth in asset prices, taking down credit conditions in a way that makes things easier for people at the margin.  People say it’s not going to work but that’s actually false, we demonstrated and there is new research coming out from the Bank – and here the Bank has been consistent and I think it’s right – that it does move interest rates, it does move asset values, it does move things that actually do help the economy.  The second thing which I spoke about in the speech earlier this past week is there are ways that the Bank can work with government, it doesn’t have to be partisan, it’s not about what choices to make on the budget, it’s about trying to get rid of the logjam that we have in credit in this economy.  Small and medium business, new business is being starved of credit and we have seen a huge shortfall in investment and that’s because there is this overhang of debt and the Bank of England, as somebody who can make debt more liquid and can bear risk, should step in with the government to make that situation better.

DERMOT MURNAGHAN:

But you are positing there that quantitative easing works, let’s talk about the United States economy which of course you know an awful lot about.  I mean quantitative easing there, hundreds of billions of dollars printed and poured into the economy and all it seems to have done is stoked inflation and no resulting growth.

ADAM POSEN:

Let’s be a little careful here.  Stoked inflation – inflation right now is well under 3% and is not going to accelerate at the moment.  In fact inflation under Ben Bernanke has been lower than it was under Greenspan and Volke, despite the QE.  Secondly, didn’t help growth – well that always unfortunately depends on a counter-factual, what would it have been in the absence of QE?  As the data showed, the US economy is behaving a lot more like the UK or other European economies in that it wasn’t recovering as strong as people thought and the ways in which it did recover, strong investment for example, is through quantitative easing helping I think.  So I can’t prove it directly but it makes a lot of sense, the same way as if I pop an antibiotic I may not that day feel better but probably if I stick to the course I’ll be healed at the end of two weeks.

DERMOT MURNAGHAN:

Indeed.  Is the greatest threat to the UK economy and indeed perhaps to the United States economy given Tim Geithner’s appearance at the Finance Minister’s meeting in Poland on the Eurozone, is that a threat which we can’t really do much about but one which poses real risks to the global economy?

ADAM POSEN:

I think you put it very well, it is the biggest single threat to the global economy, it is bigger for the UK or for the US or other people who are not as tightly tied to Europe but we are all tied to Western Europe, we’re all tied financially, politically, economically, commercially and people, there’s no avoiding it.  The Bank of England, the financial stability side which I don’t work on, people like Paul Tucker and Andy Haldane and Governor King and Andrew Bailey and Hector Sands are working very hard to make sure we know where all the linkages are, that British banks are as well capitalised as they can be, that’s the best we can do but in the end if something terrible happens in the euro area, it will be very hard for the UK and for the rest of the world and that’s why we are all trying to get them to just make a decision because it is a soluble problem, they just have to make a decision.

DERMOT MURNAGHAN:

Ah, well I have to pick you up on that, a soluble problem, you make it sound as if it is quite simple.  What should Europe do?

ADAM POSEN:

Well the specifics of it are up to the European officials who are part of the Euro area but the economics is pretty straightforward.  You can’t get blood from a stone, the amount of debt that has been racked up in Greece and elsewhere is more than these economies can bear especially if fiscal and monetary policy are tight so somebody has to take the loss and if you took the loss, if the somebody is central Europe, the rich countries of central Europe, take the loss then there will stop being all this fear across markets.  Is that entirely fair?  No, but it’s not as unfair as people think given that the rich countries in central Europe were the ones who lent the poor countries the money and it also doesn’t really in the end matter whether it is fair or not because they’re going to be the worst off except for Greece if things go wrong so it’s about biting the bullet and recapitalising their banks as the head of the IMF, Christine Lagarde and the head of Deutsche Bank, Josef Ackerman, both said.

DERMOT MURNAGHAN:

Well I guess so many in Germany may have a different view on that but Mr Posen, thank you very much indeed for your time.  Adam Posen there from the Monetary Policy Committee of the Bank of England.