LONDON (MNI) – There isn’t a strong case for not extending
quantitative easing to index linked gilts, Bank of England Monetary
Policy Committee member Martin Weale said Friday.

So far QE, through both its first and second phases, has been
limited to conventional stock but some analysts have questioned why it
has not embraced index-linked gilts. Weale makes clear he believes it
could cover linkers, but said it was an operational matter for the
central bank.

In his speech at the National Institute of Economic and Social
Research, Weale said the BOE’s latest forecast made a strong case for
more QE when the current round of asset purchases expires in February.

In the question and answer session he said there were “tactical
limits” on how fast the MPC can go in asset purchases, with the MPC
acknowledging gilt market capacity is imposing speed constraints on QE.

Asked why the MPC doesn’t buy linkers Weale said “I can’t see
strong reasons for not buying index stock as well as conventional
stock.”

“But those are largely operational decisions left to the
operational side of the Bank,” he added.

One view is that buying index linked stock will distort market
based inflation expectations, with break-even inflation expectations
derived from index linked and conventional gilt yield differentials.

Weale said he would expect that buying index stock would result in
pushing down yields on it in the same as it has driven down yields on
conventional gilts, but it was not an important consideration.

“Because both markets are fairly broad I don’t think it actually
makes a lot of difference … If you have apparent arbitrage arising
between conventional stock and index stock then I would expect the
yields on the index stock to adjust and move in line,” he said.

He rejected the idea the MPC’s current, ultra stimulative policy,
which has driven down interest rates, could actually harm growth.

“I can’t really picture that it would have a negative effect,” he
said.

“If interest rates are low then capital is cheaper, people can
invest more. We all understand that (low rates) does make life more
difficult for people who need a high interest income but those are
pension funds or people who are investing directly for income,” he said.

“I haven’t been able to think of clear mechanisms by which I could
think quantitative easing would slow the economy,” he said.

In other comments, Weale said the puzzle of why UK net trade had
not picked up more in light of the depreciation of sterling had largely
disappeared with the latest data revisions.

Nevertheless, he highlighted the problems the UK faces rebalancing
its economy through boosting net exports.

One “very real problem is that 40% of our exports do go to the euro
area and the euro area isn’t a picture of economic health at the
moment,” he said.

Weale was downbeat about the near term outlook for UK growth.

“My sense at the moment is that output is broadly flat. I wouldn’t
like to put a percentage number around the risk of another recession but
I think it would be foolish to say anything expect that it is quite
appreciable at the moment,” he said.

— London Bureau +20 7862 7491; e-mail: drobinson@marketnews.com

[TOPICS: MT$$$$,M$$BE$]