LONDON (MNI) – The following is the second part of the full text of
the new Bank of England Monetary Policy Committee member Ian
McCafferty’s written answers to the Treasury Select Committee of
the House of Commons on monetary and economic policy.

14. What has been the overall effect of quantitative easing on the
UK economy?

It is difficult to be precise about the effects of quantitative
easing, both because we do not have a counterfactual of how the economy
would have performed without it, and because there is little evidence
about likely time lags between the implementation of the policy and the
full impact on the economy V as far as the more recent programme of QE
is concerned, we are still in the early stages. However, it would be
difficult to argue that it has had no impact. Following the announcement
of the first round of QE, asset prices reversed their previous downward
trend, and estimates of the impact on gilt yields suggest that they were
up to 100bp lower as a result of QE than would have been the case. The
impact on both market sentiment and liquidity of the first round of QE,
undertaken at a time when credit markets were effectively frozen, seems
also to have been positive. The Bank has produced some estimates of the
impact of the first programme of QE on the broader economy, estimating
that it raised the rate of inflation by .-1. percentage points, and the
level of GDP by 1.-2%, relative to what would have otherwise been the
case. These estimates do not look implausible, but are necessarily
surrounded by a significant margin of uncertainty, given that the
econometric estimates of the effect on the broader economy of an easing
in policy through QE are as yet less well understood than those from
changes in short-term interest rates.

15. How important are current measures of inflation expectations
when considering the outlook for future inflation?

Inflation expectations are an important part of the monetary policy
framework, in that the credibility of the MPC and of the inflation
target are important elements in achieving the inflation mandate. The
more stable are inflation expectations, and the more credible the policy
framework, the lower the effect on underlying inflation of one-off price
shocks to the system, and the greater the consistency of wage- and
price-setting behaviour with the inflation target. It is therefore
important that the MPC monitors both the direct surveys of inflation
expectations and other indirect indicators. However, such indicators are
better interpreted in terms of what they indicate about short term
attitudes and behaviour than as predictors of inflation in the
medium-term, with which the correlation is poor.

16. What impact do you think the Funding for Lending scheme and the
activation of the Extended Collateral Term Repo Facility will have on
the economy?

Although the quantitative easing programme raised both equity and
bond prices and has thus reduced the cost of finance to companies with
recourse to the capital markets, the indirect impact of QE on bank
lending appears to have been much less, with flows of lending to the
broader economy remaining depressed. While some of this will have been
due to low levels of demand for bank lending, reflecting the uncertain
outlook for the economy, targeted incentives to both boost the volume
and reduce the cost of lending, that are built into the Funding for
Lending Scheme, are likely to be of benefit. The impact is likely to be
supplemented by the changes in the amount of liquid assets that banks
are required to hold recently announced by the FSA in response to the
recommendation of the FPC. Together these should help expand lending
flows to the broader economy, though the impact is likely to be more
visible over the medium term, as it is likely to take time for the
increase in lending to take effect.

Recent heightened uncertainty about the health of individual
Eurozone banks poses risks of illiquidity stress in the inter-bank
markets. If inter-bank liquidity were to dry up as it did in the months
following the collapse of Lehmans, this would pose risks both to the
stability of the UK banking system and further depress levels of
lending. The activation of the ECTR, which would permit repo operations
against a wider range of collateral, is a useful precautionary measure
to help support lending conditions in the event of liquidity stresses
within the banking system re-emerging.

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

[TOPICS: M$$BE$]