–Adds Detail To Version Transmitted At 1619 GMT
London (MNI) – The Bank of England is going “about the right rate”
in purchasing gilts for its quantitative easing programme, and going
faster would increase the risk of disorderly auctions, BOE Executive
Director Markets Paul Fisher said.
Fisher’s comments make clear that while there is no hard “speed
limit” on QE, the central bank’s assessment shows it could well run into
difficulties if it tries to accelerate from the current pace of Stg75
billion of asset purchases over four months.
Some analysts who have pencilled in more aggressive QE have tended
to downplay the risk of market disruption, but the MPC is well aware of
the threat.
“We have a certain period over which to buy those assets. The
markets at the moment are not functioning fully, generally across a
whole range of asset markets, so I think we are going about the right
rate,” Fisher told the Treasury Select Committee.
“Nobody actually really likes doing asset purchases … If I
thought we could get away with doing less I would prefer that,” Fisher
added.
He said, however, that as more QE was the option they had on the
table they would do what was necessary. Asked if he could step up the
pace of QE, Fisher said yes, but it carried the risk of uncovered
reverse gilts auctions.
“We could go faster … The faster we go the more risk is that some
of our operations don’t quite deliver the amount of gilts we want to
purchase,” he said.
“There is a certain capacity in the market to supply gilts
depending on how much risk the market makers are allowed to take and we
have to reflect that in our operations,” he added.
“Can we go a bit faster ? Yes, but the risk just builds up that you
can have some disorderly operations,” he said.
–BOE King: Euro Area Increasing Threat To UK Economy
In earlier evidence Bank of England Governor Mervyn King told the
TSC the euro area crisis has been an increasing threat to the UK’s
economic recovery, and the Bank of England needs contingency plans
against it deteriorating further.
King cited the Eurozone’s turmoil as the key factor behind the
sharp growth downgrades in the BOE’s November Inflation Report. He said
there were also clear signs of slowing growth in the world economy as a
whole.
The BOE slashed its growth forecasts this month to show growth of
just under 1.3% this year and just over 0.9% next year.
“Looking at growth over the next 12 months … growth in the first
year has been revised down across the board by over 1 percentage point,
so it is a very big reduction,” King said.
“I would say the bulk of that can be attributed, directly or
indirectly, to a changed perception about circumstances in the euro
area,” he added.
The direct impact comes from lower UK exports to the euro area and
the indirect ones from the hit on asset prices and wealth “and also
credit spreads are higher because of the funding costs of our banks, as
well as those in the euro area.”
“Taking all those things together the bulk of the downward revision
is ultimately (due to) the news since August about what is happening in
the euro area,” King said.
He refused to put a precise percentage on what proportion of the UK
growth downgrade was due to the euro area’s woes. Nevertheless, his
comments will provide support to the government, which is insistent the
Eurozone, rather than any domestic factors, are key to the current
weakness of the UK’s economic outlook.
More than a year ahead, the BOE made only small changes to its
growth outlook, with a rebound in the second and third year forecasts.
King said the “extreme events” that could emerge from the euro area
were simply not included in the central bank’s November forecast, and he
declined to comment on the outlook for individual euro area states,
focussing instead to the underlying weaknesses in the Eurozone.
“Underlying this problem is a crisis of current account imbalances.
Germany and the Netherlands have very large trade surpluses, many
economies in the south, including Greece, have large trade deficits,” he
said.
“The question is how can they get back to a point when these can be
financed and, ultimately, the debt serviced ? What we have seen is that
the private sector since the summer has indicated pretty clearly that it
doesn’t want to finances these current account deficits. That has left
governments to finance these deficits,” he added.
However, the most recent addition to the MPC, Ben Broadbent, cited
domestic factors as key elements in the current soft economic outlook.
“Over longer periods of time I am not sure it is consumer
confidence that determines growth … A more important consideration in
thinking about growth over two, three and four years is underlying
productivity growth,” he said.
“We have seen steep falls in consumption and, recently, I would
attribute a lot of that … to very weak real income growth, itself the
result of hits to VAT and, more importantly, to energy prices and,
indeed, weak productivity,” he added.
“Looking ahead that is one relatively bright aspect of the (BOE’s
November) projection. As long as we don’t get increases in those costs
on the scale we have seen over the last year or two … then real income
growth, and consumption growth too, will improve,” he said.
For further information contact David Robinson on 4420 7862 7491
or e-mail: drobinson@marketnews.com.
[TOPICS: M$$BE$]
