–Adds Detail, Quotes to Version Transmitted 1134 GMT
LONDON (MNI) – The second wave of quantitative easing is set to be
as effective as the first, and there is no hard expectation in the
markets the Monetary Policy Committee will extend it further, MPC
members said Wednesday in evidence to the Treasury Select Committee.
MPC members were questioned over whether QE was effective at
present as markets had learned to anticipate it. They defended the
policy, highlighting the similarity between its impact and that of
conventional monetary policy.
“I don’t think it is unique in any sense … It certainly has
effects on market expectations and effects on rate of returns on savings
and investment but, after all, that is exactly the mechanism by which
monetary policy is meant to work,” BOE Governor Mervyn King said.
“If you think the economy is weak, then one of the reasons we cut
interest rates is to stimulate consumption and reduce savings – that is
the mechanism by which it works. So I don’t think there is anything
special about asset purchases,” he said.
King said he did not believe there were “any hard and fast
expectations that we’re going to do much more (QE).”
When MPC member Adam Posen was asked if QE2, the second wave of
quantitative easing launched in October, will be as effective as QE1 he
said “I think it will be.”
“There is one major difference between QE now versus, say, 2009. It
is we don’t have the outright lock-up and panic in the markets.”
QE back in 2009 had the additional impact of being able to ease the
market lock-up, and Posen said this effect will not be there for QE2.
“Thankfully, we are not in that kind of bad situation, so we don’t
get that additional benefit. But all the other channels for quantitative
easing … remain operative,” he said.
BOE Deputy Governor Paul Tucker defended the MPC’s decision to look
through high near term inflation and to focus on the medium term
outlook, with the MPC having sanctioned more QE when inflation was well
above target. He also insisted the MPC’s strong growth forecasts had
simply been a forecast error rather than a tactical move.
“We put the interests of medium term inflation first, and by
doing so have been able to support demand and, I would say, jobs in the
economy,” Tucker said.
He said this collective judgement was much bigger deal than any
divisions in the vote count on the nine-member committee.
“This has been a very, very big judgement and the difference on the
committee, whether it is 8-1 or 6-3, pales into insignificance with that
judgement. If you look around other central banks in the world they
haven’t all made the same judgement,” Tucker said.
Asked if the MPC’s recent strong growth projections had been
convenient or an honest error Tucker said, “It is an error.”
The headwinds from Europe, the slowdown in the States in the autumn
… these external influences have arrested the recovery of our economy
and we didn’t see that and it was an error.”
“Forecasting errors will always be with us,” he added.
–Bean Confident Household Spending To Rise in H2
Deputy Governor Charles Bean also defended the MPC’s view that
household spending will pick-up pace in the second half of this year.
Bean said it is “a key question, if they (households) have fully
adjusted or if there is any more adjustment to come” to the
deterioration in expected earnings.
“I think quite a lot of the adjustment has probably
come through and that is why I am reasonably confident that barring any
unforeseen, adverse shocks in the course of this year that we should see
household spending growth pick-up as we go through into the second half
of this year as the squeeze on household incomes fades,” he said.
–King: Eurozone Developments May Impact Policy, Not BOE Forecasts
King was questioned by TSC members over the MPC’s decision to
exclude extreme euro area risks, including a break-up of the single
currency zone, from the BOE’s Inflation Report forecasts.
He defended the approach, saying some euro area developments may
well influence MPC policy but they would not impact on the forecasts, as
they are unquantifiable and he point blank refused to provide the TSC
with a list of euro zone risks.
“One thing you cannot do in present circumstances is to write a
list of risks, because we do not know exactly in what way the monetary
union could break up and cause real chaos,” he said.
“If you cannot even write down the various things that could
possibly happen you certainly can’t attach probabilities to them and put
them into a fanchart,” King added.
“So there are several kinds of uncertainty which we think are
impossible to calibrate, therefore we left them out of the fanchart but
they may well affect our policy judgement,” King said.
“What we can do is respond to things that are happening. We have to
be alert and respond,” he said.
–Posen: Further stg25 billion QE Not Material
Posen, along with fellow MPC member David Miles, voted for stg75
billion further QE at the February meeting, while the other seven
members backed stg50 billion. He told the TSC the difference was not
material, implying he will not vote for another stg25 billion in coming
months.
“Whether or not we add stg125 billion or stg150 billion to me is
not actually material,” Posen said.
“What is important is we have done the equivalent, roughly, of a
100 basis point plus cut in interest rates,” he added.
King took encouragement from the January money supply data,
published by the BOE Wednesday.
“They show a large increase which more than offsets the fall in
November and December. Now, we shouldn’t pay too much attention to any
one month … but actually for the last three months then money has
actually expanded,” King said.
“So, that is encouraging news this morning,” King said.
–London newsroom 0044 20 7862 7491; email: drobinson@marketnews.com
[TOPICS: M$$BE$]
