LONDON (MNI) – With inflation still running well above target,
there will be nervousness about providing more stimulus until the
underlying inflation dynamics become clearer, Bank of England Chief
Economist Spencer Dale said in a Bloomberg TV interview.

Dale sounded a note of caution over adding to the Stg275 billion of
quantitative easing the MPC has already carried out. While Tuesday’s
data showed headline CPI fell to 4.8% in November from 5.0% in October,
it is still far from the MPC’s 2.0% target and Dale said the outlook
beyond the first quarter of next year was uncertain.

When asked why current high inflation should prevent more QE, as
the MPC is forecasting it will eventually fall back below target, Dale
highlighted the uncertainty of the inflation outlook.

“The economic outlook is very uncertain at the moment. There are
risks to the downside … with growth this weak and the possibility that
events in Europe could escalate,” he said.

“Although we expect inflation to fall sharply in the first quarter
of next year that will get to a number around 3.0% or even below 3.0%.
What is far more uncertain and far more important for monetary policy is
how quickly inflation falls beyond the first quarter” and that “would be
another key factor determining monetary policy,” Dale said.

“Although the direction of travel is clear, that inflation is
falling, we are starting at a higher number … Until we get a better
sense of underlying inflationary pressures I think there will be a
nervousness in terms of the extent to which one could keep on
stimulating the economy,” he added.

Dale was dismissive of the criticism that QE will not work this
time around, with gilt yields already at record lows.

“There is strong evidence to suggest quantitative easing had a big
impact in 2009 when we did it the first time around and I am equally
confident that quantitative easing should provide important support for
activity and the economy this time around,” he said.

The Bank for International Settlements recently published work
suggesting there could be a diminishing impact from QE but Dale
downplayed the difference between the BIS work and the BOE’s own views
on the impact of QE.

“A key message from the BIS paper was that quantitative easing
works, and it can have a long and lasting effect on real incomes,” he
said.

While the BIS were different from the BOE’s he said “all sorts of
technical factors can explain that.”

Dale said the aim of QE was not to lower government borrowing costs
but to reduce the supply of gilts and encourage institutions to invest
in other assets, such as corporate bonds.

–London newsroom: 4420 7862 7491; email: drobinson@marketnews.com

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