Bank of England Deputy Governor Charles Bean became the third policy maker to signal the central bank might add to its emergency stimulus plan if needed even as its second wave of bond purchases has only just begun.
“If we need to undertake further purchases then we will do so,” Bean told the Guardian newspaper in an interview published on its website today. A Bank of England spokesman in London confirmed the comments.
The nine-member Monetary Policy Committee expanded its bond-buying program by 75 billion pounds ($118 billion) to 275 billion pounds last week. The central bank noted “severe strains” in bank funding markets and Governor Mervyn King said the move was a response to what may be the worst financial crisis ever.
Policy maker Adam Posen told Bloomberg Television in an Oct. 11 interview that the MPC “will readjust it if it turns out we need more.” His colleague Martin Weale said on Oct. 9 the central bank has “a lot of scope” to increase the plan if deemed necessary to boost economic growth.
“There has been a noticeable deceleration in activity indicators, not just in this country but across the globe as well,” Bean said. “On top of that is layered all the concerns about the twin euro-area sovereign-debt and banking-sector crises. Businesses in these circumstances tend to put investment projects on hold; consumers tend to hold back from spending. It just makes people much more wary.”
The pound weakened against seven of its 16 major peers today and was little changed against another seven. The U.K. currency was trading at $1.5696 as of 11:24 a.m. London time, down 0.4 percent on the day.
U.K. output has barely expanded over the past year and government figures yesterday showed unemployment climbed to a 15-year high of 8.1 percent, fueling concerns the economy could tip back into recession amid slowing global growth, government spending cuts and the biggest squeeze on household incomes since the 1970s.
Two years after the recession ended, gross domestic product is 4.4 percent below its peak level in the early 2008, representing the weakest recovery for almost a century. Alistair Darling, finance minister in the previous Labour government, warned yesterday of “a very long period of stagnation with tremendous cost to the country.”
Until this month, Posen was alone on the MPC in pushing for the bank to revive quantitative easing, the process of pumping cash into the economy by buying government bonds with newly created money.
He began his yearlong push for more asset purchases in October last year. Bean, meanwhile, has voted to maintain policy at every meeting since backing the last increase in November 2009. Minutes showing how policy makers voted this month will be published Oct. 19.
Chancellor of the Exchequer George Osborne announced plans on Oct. 3 to ease the credit strains facing small and medium- sized companies by using the proceeds of Treasury-bill sales to buy corporate bonds or packages of securitized bank loans.
Bean defended the bank’s decision to focus on government bonds, despite an option to buy as much as 50 billion pounds of private-sector assets. Corporate bonds account for just over 1 billion pounds of the assets the bank has bought so far.
“It’s inappropriate for the bank to stray into the territory of deciding where credit should go,” he said. “That is moving into territory that is the domain of government.”
While U.K. banks have relatively small direct exposures to the debt of peripheral countries like Greece, they are closely connected with banks in mainland Europe, and these close links possess “the potential to lead to a seizing up of the financial system,” Bean said.
Bean, who also sits on the Bank of England’s Financial Policy Committee, said he is strongly in favor of recapitalizing European banks, and Britain could end up joining in. “It may be that given how the plan is designed, that the chancellor may decide it is appropriate for the U.K. to be part of this, too,” he said.
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