-Repeats Item First Transmitted Saturday.
-BOE Dale: Policy Can Respond if Economic Outlook Deteriorates
-BOE Dale: Upping Stimulus May Not Be Right Response to Weak Growth

DUBLIN (MNI) – Bank of England Chief Economist Spencer Dale has
highlighted the risks attached to prolonged, ultra loose monetary
policy, warning of the dangers of perverse effects from quantitative
easing and saying providing more stimulus in response to weak growth may
be the wrong thing to do.

In a speech here, Dale cited the risks the central bank is
running by buying up a large chunk of the gilt stock through QE and by
pumping in stimulus when there are deep concerns over supply side
weakness in the UK economy.

Dale voted against the stg50 billion increase in QE sanctioned by
the MPC at its July meeting and has consistently been more cautious than
his colleagues over increasing monetary stimulus.

In this speech at a conference at Trinity College, Dale said that
monetary policy may be able to do little to stimulate growth and could
run up against supply constraints.

“Injecting additional monetary stimulus when we observe weak output
might not be the right thing to do,” he said.

UK productivity growth has slumped and Dale said if supply and
demand weakness were both due to external factors, such as tight credit
and an impaired financial system, “further demand stimulus may run up
against supply capacity relatively quickly and so largely result in
higher inflation.”

Providing further stimulus would be the right thing to do if weak
growth was due to weak demand, but Dale highlighted policymakers’
uncertainty over what is happening in the economy at present.

The BOE chief economist also highlighted the risks attached to his
own institution’s favoured stimulus policy, QE, which relies on
purchasing industrial quantities of gilts.

The BOE’s in-house view is that QE works, in part, through
“portfolio effects” – driving down the yield on gilts and encouraging
investors to opt for higher yielding, and higher risk, assets.

“QE works by encouraging institutional investors to hold an
increasingly risky portfolio of assets. This helps to increase the
demand for debt and equity issued by UK companies. But it comes at the
expense of increasing the risks borne by key parts of our financial
sector,” Dale said.

The BOE, which is undertaking a stg375 billion QE programme, has
already acquired around 40% of the total stock of conventional gilts.
Eventually, it will have to unwind QE and sell-off those gilts which
haven’t reached maturity.

Dale worries about the impact these blockbuster sales could have,
as investors will have to reduce other type of assets to buy the gilts.

“Achieving this portfolio rebalancing without unsettling the
government bond market and, equally important, causing a substantial
crowding out of private sector debt will be a delicate task,” Dale says.

He also says the BOE needs to take seriously the perception, albeit
a misplaced one, that QE is simply “monetary financing”, with the BOE
stepping in at a time when fiscal deficit are close to post war highs.

Dale was more enthusiastic about the Funding for Lending Scheme,
the flagship credit easing scheme created jointly the Treasury and the

He believes this could have a significant effect as, by providing
banks with cheap funding and encouraging them to lend more, it should
tackle credit constraints.

“By helping to improve the availability of bank lending to
companies and households who previously have been effectively starved of
credit, it could have a significant effect on demand,” Dale said.

For all his reservations over ultra loose monetary policy, Dale
stresses the MPC has scope to inject more stimulus if the economic
outlook becomes darker still.

“There is scope for monetary policy to do more. If the economic
outlook deteriorates further, policy can respond. We have not yet run
out of road,” he says.

–London Bureau; Tel: +44207 862 7491; email: