–Miles Argues QE Will Be Effective Second Time Around
–Output Surveys Suggest Q4 Growth Could Be “Broadly Flat”

LONDON (MNI) – The economic outlook has deteriorated and policy
should be set to avoid stagnation and reduce the risk of inflation
coming in below target, Bank of England Monetary Policy Committee member
David Miles said.

Miles said he believed quantitative easing would be effective the
second time around, as it was in the first wave. His comments make it
clear he backed the MPC’s decision to restart quantitative easing at its
October meeting – although the minutes are not due out until Oct 19.

“Today monetary policy should be set to help prevent the economy
from stagnating and driving inflation to sit persistently beneath the
target,” Miles said.

The MPC member said inflationary pressures had receded since the
BOE published its most recent Inflation Report, back in August.

“The outlook for growth in the UK has deteriorated over the past
months. That means that domestic inflationary pressures further ahead
look lower than I thought in August. Stress has re-emerged in financial
markets, and concerns about the stability of the banking sector have
re-surfaced,” Miles said.

“In the light of this, the MPC has decided to resume asset
purchases,” he added.

Miles described the flow of news since August as “overwhelmingly
negative.”

“The chances that inflation further ahead will sit below the target
level have risen,” he said.

In its August Inflation Report’s the MPC’s implied quarterly growth
forecast for Q4 was 0.48% but Miles sees evidence it could come in flat
instead.

“Output surveys have deteriorated markedly, suggesting that GDP
might be broadly flat in the fourth quarter,” he said.

He highlighted the increased stress in financial markets and
pressures on funding, and said while it was unclear whether this would
persist monetary policy has to respond to the here and now.

“Right now the likely future levels of UK inflation pressures look
to me materially lower than in August. Monetary policy should respond to
that,” he said.

QE Will Work Again

Miles also used his speech, at a Royal Economic Society event, to
reprise his theory that QE works in two ways – through portfolio
substitution effects (money generated through gilts sales triggering
other transactions and impacting a wide range of asset prices) and
through a bank funding channel.

He set out his views on this during the first phase of QE and he
argued the bank funding channel could be more noticeable this time
around.

“There are very good reasons for thinking that purchases of
government bonds in exchange for money created by the central bank will
have an impact on a range of asset prices and will influence the cost
and availability of credit to the private sector,” he said.

While gilt yields are lower this time around than during QE1 Miles
noted there were more gilts to buy. With the BOE purchasing gilts of
greater than three year maturity, there are now over stg500 billion
worth in this category in the market compared with stg375 billion back
in Spring 2009, when QE1 was unveiled.

And QE could help alleviate funding pressures.

The “deterioration of funding conditions suggests to me that asset
purchases now could support credit and demand growth not only via the
portfolio substitution channel but possibly also via what I have called
the bank funding channel,” he said.

–London Bureau; Tel: +7862 7491; email:drobinson@marketnews.com

[TOPICS: MT$$$$,M$$BE$]