Bank of England policy maker David Miles said officials were right to loosen policy to aid an “anemic” economy and indicated he may be open to adding further to stimulus.
“The banking system across much of the rich, western world remains damaged,” Miles said in a speech in Edinburgh late yesterday. “Monetary policy in the U.K. has been set to its most expansionary setting in history, and I believe it is right that it is still being moved further in that direction.”
The comments came days after Bank of England Chief Economist Spencer Dale warned of the risks related to a prolonged period of loose policy. Miles, who said a “rapid return to more normal monetary policy is not imminent,” told reporters that he is “open minded” about further stimulus.
Dale was one of two officials outvoted at the Bank of England’s policy meeting in July, when the bond-purchase target was increased by 50 billion pounds ($80 billion). Miles was among the majority who favored more quantitative easing.
“The bigger picture is that over the last 12 months it’s been pretty flattish output,” Miles said to reporters after the speech. “The right strategy has been to be make monetary policy more expansionary, which is what we’re doing now. Lets see where we are at the next few meetings. I’m open minded about what the next move should be.”
Miles also said the latest measures announced by the European Central Bank to calm the debt turmoil in the euro area could have a “significant” impact on the U.K. The currency region is Britain’s biggest trading partner.
In his speech, Miles said the economy’s weak performance is a sign of the “powerful” forces holding back the recovery rather than the impotence of QE. Policy makers voted last week to continue the 50 billion pounds ($80 billion) of bond purchases they authorized in July.
The central bank also left its benchmark interest rate at a record low of 0.5 percent this month, where it’s been since March 2009. Minutes of the decision, to be published on Sept. 19, will show whether officials discussed a further reduction. They said in July that they would assess the merits of such a move in the light of their new Funding for Lending program.
Miles said that with rates so low, the benefits of a cut may be overshadowed by the destabilizing impact from the squeeze it would create on lenders’ margins. He said the reasons the bank didn’t reduce borrowing costs further in 2009 probably still apply, “though this is something to keep monitoring.”
Still, a rate near zero doesn’t mean policy makers are powerless, Miles said. They can always expand asset purchases or increase liquidity insurance to banks. He also said that the central bank will probably operate “permanently with a substantially larger balance sheet.”
“Banks have learnt that they took excessive liquidity risks before the crisis, and are likely to want to hold substantially higher levels of liquid assets,” he said. “Some of these assets are likely to be held in the form of central bank reserves.”
Miles also said that reversing the BOE’s “unusually accommodative” policy will be determined by the inflation outlook. He expects any withdrawal of stimulus to begin with rate increases.
He said the central bank hasn’t abandoned its 2 percent inflation target and the weak performance of the economy doesn’t mean that QE has not helped to limit the damage from the financial crisis.
“Some people take that fact –- the fact of weak output –- as proof that monetary policy has stopped being effective,” he said. “This is not very convincing because it ignores the range of factors which have restrained demand and which might have caused output to fall significantly had not an increasingly expansionary monetary policy been pushing back in the opposite direction.”
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