-Not Sure QE Impact As Powerful As Some BOE Estimates
-Sterling May Need To Fall Further To Help Close Trade Gap

GUILDFORD (MNI) – The case for further quantitative easing in the
near term will be strengthened if the impact of the Bank Of England and
Treasury bank funding initiatives are slow to materialize, BOE Monetary
Policy Committee member Martin Weale said.

BOE Governor Mervyn King outlined in last week’s Mansion House
speech a joint BOE/Treasury plan to provide banks with cheap funding in
return for increased lending, along with new BOE liquidity injections of
six month money. Weale said the key reason he did not back for stimulus
at the June MPC meeting was he wanted to assess the likely impact of
these new schemes.

“Ahead of the next meeting I want to try and form a better view of
the likely effects of these measures (ECTR) in terms of demand. That
will then influence whether and, if so, by how much I think there should
be more asset purchases,” Weale told reporters.

The Funding-for-Lending scheme is still under development, although
King said it could be launched within weeks. The MPC may not have any
clear evidence of its impact for some time, but Weale said they would
try and predict its effect on market interest rates.

“We take account of what we think their effects may be, when we
expect them to happen. If some of the new policies are relatively slow
to have an effect then that would increase the case for further asset
purchases in advance of that,” Weale said.

In the question and answer session after his speech, Weale said the
trade gap needs to close and sterling may well need to fall further to
help it do so.

Weale said the trade gap was an important issue for him and that
sterling’s fall back in 2008 had had less impact on it than he had
expected, and that the currency may need to become more competitive
still.

“The depreciation that we had in 2008 I thought would do more to
close the trade deficit than so far it has, there may be a number of
explanations for that, the international trade environment hasn’t been
comfortable to say the least,” Weale said.

“The trade deficit will need to close further and sometimes I do
wonder whether the exchange rate might need to be more competitive than
it is at the moment in order to help with that,” he added.

Sterling fell sharply on its trade weighted index from very late
2007 through 2008, declining from 100.2 on its broad trade weighted index
on December 18 2007 to below 80 in December 2008.

In response to a question on the effectiveness of QE, Weale set out
the BOE’s view that it is working through driving down gilt yield and
subsequent portfolio effects, but he thought some BOE research may have
exaggerated its impact.

“I’m not sure that it has necessarily been as powerful as some of
the estimates from the bank have suggested,” Weale said.

He said the latest BOE and joint BOE/Treasury initiatives, the
Extended Collateral Term Repo auctions and the Funding for Lending plan,
should reach parts of the system that QE has not.

-London Bureau +20 7862 7491;
drobinson@marketnews.com/wwilkes@marketnews.com

[TOPICS: M$$BE$]