Dale, who was speaking at Trinity College in Dublin at the weekend, said injecting additional monetary stimulus when observing weak output might not be the right thing to do.
“We don’t fully understand the structure of the economy or the behaviour of households and companies within it. Not even close. And we don’t know the nature of the shocks affecting the economy, even long after they have occurred,” he said.
“Monetary policymakers face substantial uncertainty. That is not defeatist or wimpy; it is a fact of life. And it needs to be borne in mind when deciding how ambitious we should be in our monetary policy objectives.”
Dale said there are limits to how much should be asked of monetary policy.
“If we thought weakness in both demand and supply were being driven by some other factor, perhaps related to our impaired financial system and the sustained period of tight credit conditions, in this case, further demand stimulus may run up against supply capacity relatively quickly and so largely result in higher inflation.
“If the handbrake on your car is stuck, putting your foot further and further down on the accelerator won’t get you very far before the car starts to overheat,” he added.
Dale said monetary policy should provide short-term support in times of need, but it must not become a long-term crutch.
“We need to consider the potential costs as well as benefits of further policy easing. We are in unchartered – and potentially dangerous – waters,” he said.
His comments come after the Monetary Policy Committee’s decision in July to increase QE by £50bn to £375bn. Dale had wanted to leave the amount unchanged but was outvoted.
Economists now expect the committee to add another £50bn in November, despite opposition from pensioner groups whose incomes have been devastated by low interest rates.
