LONDON (MNI) – The view that quantitative easing is ineffective is
flawed – the Bank of England Monetary Policy Committee has sanctioned it
simply because it wants to hit the 2.0% inflation target, Bank of
England Monetary Policy Committee member David Miles said.

In an op-ed piece in the Evening Standard ahead of a spech in
Edinburgh, Miles sets out his arguments for favouring QE, and insists it
is a better option than simply injecting money directly into the
economy.

Miles, the most dovish member on the MPC, voted in favour of the
Stg50 billion increase in QE in July, and was very likely one of those
who said at the MPC’s August meeting that “a good case could be made at
this meeting for more asset purchases.”

He noted in the op-ed piece that some people have argued the
weakness of UK output is proof that monetary policy, and specifically
QE, is no longer effective.

“This ignores the factors which have restrained demand – and which
might have caused output to fall significantly had not an increasingly
expansionary monetary policy been pushing back in the opposite
direction,” he says.

The deterioration in banks funding conditions and falling
confidence have hit demand, he says.

The MPC has faced calls for more radical action, such as helicopter
drops of money, but Miles says that “a helicopter drop can be
irreversible, and pay no attention to the inflation consequences,” or if
it is done in a way that is reversible it is similar to QE.

“Why would irreversible helicopter drops be superior, when they
might ultimately generate unwelcome inflation pressures?” he says.

In Miles view the decision to press ahead with QE is an affirmation
of the MPC’s commmitment to its inflation mandate.

“The decision of the MPC to embark on QE was not done because it
had abandoned the inflation target; it was done because of the inflation
target. It was done because the outlook for demand has been so weak that
unless monetary policy was set to offset this it was likely that
inflation would be driven below the target level as output languished
far below the productive potential of the economy,” he said.

–London newsroom 0044 20 7862 7491; email:
drobinson@marketnews.com

[TOPICS: M$$BE$]