-King: BOE Will Not Cancel Gilts It Has Purchased Through QE
LONDON (MNI) – The Bank of England Monetary Policy Committee stands
ready to pump in more money if recent positive economic signs fade
away, Governor Mervyn King says.
In a speech in Cardiff King leaves the door wide open to further
stimulus but his remarks raise doubts over whether the MPC will sanction
further quantitative easing at next month’s meeting, as it is hard to
see much change in the economic signals between now and the Nov 7 and 8
meeting.
“At this stage, it is difficult to know whether some of the recent
more positive signs will persist. The Monetary Policy Committee will
think long and hard before it decides whether or not to make further
asset purchases,” King says.
“But should those signs fade, the MPC does stand ready to inject
more money into the economy,” King added.
He highlighted the mixed nature of the recent batch of economic
data, with some positive developments despite the weakness of underlying
growth.
“There are … more encouraging signs … In the private sector,
more new jobs have been created than over any other two-year period
since the mid-1990s. And … inflation has now fallen back to 2.2%,
close to our 2% target,” King says.
He warns that recent rises in domestic energy and food inflation
are “likely to leave it (inflation) a little above target well into next
year.”
Nevertheless, inflation’s recent decline has eased the squeeze on
real take home pay and King said the recent (robust) retail sales
figures were “consistent with a pick-up in consumer spending.”
The combination of weak, or non-existent growth, and strong
employment data has left the BOE working on the “productivity puzzle”.
In his speech King cites a raft of possible solutions to the
puzzle, including business responding to euro area uncertainty by
meeting demand through hiring, which can be quickly reversed, rather
than capital investment, which cannot.
“One thing we can see clearly is that the recovery and rebalancing
of the UK economy are proceeding at a slow and uncertain pace,” he says.
The first estimate of the UK’s Q3 GDP data are out on Thursday and
analysts’ median forecast is that the headline number will show punchy
0.6% growth on the quarter. King confirms the number is at least likely
to be positive, showing the technical recession has come to an end, but
he highlights the weakness of underlying growth.
“Despite the probable rise in output in the third quarter, the big
picture is that GDP is barely higher than two years ago and remains some
15% below where steady growth since 2007 would have taken us,” he says.
Overall, “judging the present state of the UK economy is far from
easy,” King says.
Another thing that will take time to resolve is how effective the
joint Treasury/BOE credit easing scheme, the Funding for Lending Scheme,
will be.
King takes encouragement from the fact that since the FLS was
unveiled UK bank funding costs have fallen, and by more than other
European ones, which have benefitted from the effect of the European
Central Bank’s OMT announcement.
However, “the effect of the FLS will be seen in the lending data
only after some months because of the time it takes for banks to change
their lending strategies and for data to be collected and published.”
While the timing of the next batch of QE, if needed, may be
uncertain King in his speech makes a clear theoretical case for it,
arguing that there is scope for further QE and that it can be effective.
The October minutes showed some MPC members were skeptical about
the likely effectiveness of additions QE.
These MPC members “while acknowledging that asset purchases had the
scope to lower long-term yields further, questioned the magnitude of the
impact that lower long-term yields on corporate debt and equity would
have on the broader economy at the present juncture,” the minutes said.
In his speech, King says that although the BOE’s QE is centred on
buying gilts, it ultimately bolsters a much wider range of assets.
“As far as the effectiveness of gilt purchases is concerned, it is
of course true that as gilt yields have declined the room for further
falls is reduced. But it is not the sole objective of asset purchases to
push down on government bond yields. Raising the price and reducing the
risk premium on a much wider class of assets is equally important,” he
says.
The BOE Governor notes that there is no question of the BOE not
having the scope to do more QE, as more gilts are currently held in the
private sector than when the MPC first sanctioned its now stg375 billion
gilt asset purchase programme.
He also argues strongly that the MPC gilt purchases were not driven
by the government’s fiscal needs, but by the committee’s judgement on
what was necessary to hit the inflation target.
The BOE Governor also takes the opportunity in his speech to rebut
some recent speculation, and policy advice, by pundits. These include
suggestions the BOE will, or should, start cancelling the gilts it has
bought or should engage in “helicopter drops” of money – pumping money
in without asset purchases.
He says the BOE needs both the income from the gilts it holds and
the ability to sell them to ease monetary policy – which would be lost
if they were cancelled.
“The Bank could not countenance any suggestion that we cancel our
holdings of gilts. The Bank must have the ability to reverse its policy
– to sell gilts and withdraw money from the economy – when that becomes
necessary. Otherwise, we run the risk of losing control over monetary
conditions,” King says.
Helicopter drops of money would present the BOE with the same
loss of control problem.
“Giving money either to the government or to households directly,
or indeed cancelling our holding of gilts, means that the Bank of
England has no assets to sell when the time comes to tighten monetary
policy,” King says.
“That is a road down which the Bank will not go, and does not need
to go. I suspect that the advocates of ‘helicopter money’ and related
ideas are really talking about a relaxation of fiscal policy. It would
be better to be open about that,” he says.
–London bureau: 4420 7862 7491; e-mail: drobinson@marketnews.com
[TOPICS: MT$$$$,M$$BE$]
