–Adds Detail, Quotes, Recasts Version Transmitted At 1008 GMT
–McCafferty Highlights Eurozone Developments Key Role In QE Decisions
LONDON (MNI) – Bank of England Monetary Policy Committee member
Ian McCafferty, giving evidence to the Treasury Select Committee,
refused to be drawn on whether he believed more quantitative easing
would be needed, but highlighted the importance of Eurozone developments
in setting future policy.
McCafferty, who attended his first MPC meeting this month, said he
would like too see more evidence on the economy before deciding if more
QE would be required and refused to categorise himself as a hawk or
dove, insisting such labels were unhelpful.
“We are in the process of the current round of QE, that will
continue for another couple of months. We are also in a position of
significant uncertainty about quite where the economy is at this stage,”
“We have significant distortions to the short term because of extra
bank holidays and so on and so forth that make it very difficult to read
exactly how the economy is performing in an underlying fashion and, as a
result, I would like to see more evidence before I were to make any
decision on whether QE needs to be extended further or not,” McCafferty
Pushed on his policy stance, he said “I’m neither a hawk or a
dove. I will be looking at the evidence at each meeting on the basis of
the best data that we have to make a decision on the basis of that. I
think that I find the (hawk/dove) appellation very unhelpful.”
He highlighted the importance of how the Eurozone crisis unfolds to
the MPC’s decision making. He said it had been central to the decision
to launch QE2 last October and would, and should, continue to be a key
factor for setting policy in the future. He focused on how the Eurozone
crisis has hit business confidence, and how the MPC policy can try and
“What the Bank has done in terms of the second round of QE,
starting last October, has had a beneficial impact on confidence … I
do think there is a role for the Bank in helping support confidence in
terms of its policy,” McCafferty said.
“I think we will need to study how events develop in the Eurozone
and elsewhere in the global economy and the impact on confidence when
making our decision on QE going forward,” McCafferty said.
In his previous job as economic adviser to business lobby group the
CBI McCafferty backed the case for QE to be extended beyond gilt
purchases, but he told the TSC he has had second thoughts on the issue.
The newly launched Funding for Lending Scheme, the flagship credit
easing scheme, should play the central role in ensuring companies can
obtain funding and this weakens the case for the BOE to purchase
“I’m now of the view that the Funding for Lending scheme, perhaps,
addresses the direct and central problem which we have which is the
availability of credit for small and medium-sized businesses,”
“I think that some of the arguments which dictate against further
intervention into broader assets through direct QE start to play a
greater part (as a result of the FLS),” he said.
He cited other arguments against extending QE beyond gilts into
“There is a risk to the Bank’s balance sheet so it would need
Treasury sanction but also, I think, that compared with the US, for
example, those corporate and other asset bond markets are not as deep
and liquid as they are in the United States so there is an issue about
intervening in those markets producing significant distortions in those
markets,” he said.
McCafferty cited damage to the broader economy from the
government’s austerity programme.
“I do think that the cuts in capital expenditure that we’ve seen
as a result of the austerity program will be damaging to the productive
potential of the economy. The reduction from 2.25 to 1.5 percentage
points of GDP is potentially damaging,” he said.
But he firmly denied he would act as a business lobbyist on the
“I come to the MPC as an independent economist not as a lobbyist
for business,” he said.
Questioned about the impact of the eventual unwinding of QE,
McCafferty said: “That is clearly going to depend on quite the strategy
that the bank adopts once it starts to reverse QE… I think it depends
very much on whether the unwinding of QE is on the basis of allowing the
bonds naturally to mature, which I think would have less disruptive
impact on the gilts market, than would selling those gilts directly back
into the market.”
“There is a timing issue if the bank is required to sell the gilts
back into the market not to disrupt (the market) and therefore steepen
the yield curve significantly,” he said.
-Signs GDP Understating Growth
The MPC newcomer believes the economy may be stronger than the
official growth data, which showed a 0.5% quarterly contraction in the
McCafferty cited evidence from tax receipts and labour market data
as evidence growth may have been understated.
“It is not only the labour market data that are suggesting that
the economy has perhaps a little more strength than the GDP data
themselves. It is also clear that the VAT and national insurance
receipts are also suggesting an economy that is slightly stronger than
the GDP data, at least for the last three quarters,” he said.
The highly volatile construction data are also a concern, as they
distort growth patterns, he said.
“I think there is a question mark about whether the GDP data is
fully capturing what is going on currently. Clearly there are issues
about the quality of the short term construction data and the
methodology for that is currently being worked on,” McCafferty said.
“I also have some concerns, and it is something I would like to
look at in my time, as to whether we are fully measuring the service
sector economy,” he added.
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