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BOE’s Bean Says U.K. Underlying Growth Is Moderate: Interview

Bank of England Deputy Governor Charlie Bean comments on the outlook for the U.K. economy, inflation, the effectiveness of quantitative easing, and the Funding for Lending Scheme.

He spoke in an interview yesterday.

On the economy:

“The business surveys, what we hear from our agents and some of the other economic indicators also seem to be consistent with an economy that in an underlying sense is growing in a moderately positive pace. It’s highly likely that the fourth- quarter GDP number will be quite weak but that will partly reflect unwinding of the boost in the third quarter from the Olympics.”

The economy is “growing weakly at best.”

On whether the economy will contract in the fourth quarter:

“One can’t rule it out as a possibility. If you look at our Inflation Report, we estimated the direct effect of the Olympic ticket sales of 0.2 percentage points. There was probably an indirect effect of about the same magnitude. That won’t be repeated, so the growth figure will be lower by that amount purely as those idiosyncratic, erratic effects unwind. So if the true underlying growth rate was 0.2, you could easily end up with a negative number. But you shouldn’t immediately say ‘the economy is back in recession or anything like that.’”

On the impact of another contraction on confidence:

“It is one of the worries. You have a number that’s artificially weak because of these temporary factors, but then the special factors get lost in the coverage, and particularly if the press choose to portray it as Britain back in recession. That clearly may end up having some adverse effects on business confidence.

‘‘All we can do is keep trying to restate this message that there will be this temporary factor depressing growth.’’

‘‘In the first quarter, hopefully by the time we get there, there shouldn’t be too many distorting factors so that may give us a cleaner read on the underlying growth rate in the economy.’’

On the biggest risk to the U.K.:

‘‘If you’re thinking about how could things go badly wrong from here, I think the euro area still has to remain that, the biggest downside risk.’’

‘‘The ECB’s Outright Monetary Transactions, I think that’s a very important initiative which has taken some of the tensions out of the financial markets but there is still a long way to go for the periphery countries in terms of readjusting to the new world, regaining competitiveness, getting their fiscal positions under control and there is always the risk of disorderly unravelling.”

“I don’t necessarily think that that’s a high probability event but it could be bumpy if it happened.”

“The fact that there is this uncertainty associated with the euro zone I think has helped to make businesses that bit more cautious about investing in the U.K. at the moment.”

On whether uncertainty is making QE less effective:

“In current circumstances, uncertainty is quite high, general uncertainty, and that being really the dominant issue that’s holding businesses from investing. Reducing the cost of finance for them by 50, 100 basis points may be rather secondary.”

“It’s a question about how much traction you get onto demand from having these lower yields. It’s not that the quantitative easing doesn’t necessarily generate lower yields, and in fact we’ve got evidence from the U.S. that if anything maybe that bit is actually working a bit more strongly at the moment. But it’s your second leg onto real spending and the economy.”

“If the degree of uncertainty in the economy declined, and people became more confident, you might at that point find quantitative easing suddenly becoming much more effective.”

“Some people say that there’s diminishing returns from doing more quantitative easing, this argument doesn’t imply that, it just says that the size of the policy multiplier depends on the state of the economy.”

“This is why it’s very important to understand the nature of the productivity puzzle, what’s driving it, because it’s crucial in deciding how much room for further policy stimulus there is before it starts to feeding markedly into more inflationary pressure, and also whether you need other policies to help unlock the problem.”

“We’re certainly trying to do a hell of a lot to think through what the cause of the productivity weakness is. Ideally you want to try and get further down that road before you start talking about a policy tool to deal with the problem that we haven’t managed to diagnose yet.”

“Certainly, we haven’t closed the door forever on further asset purchases and it would be incorrect to say that we’ve decided they’re ineffective at the current juncture. The bang for buck might be a bit less now than it was in 2009. That doesn’t mean to say that you don’t want to do anymore of it, it just means that to get the same effect, actually you have to do even more than before.”

On inflation:

“The domestically generated inflation component is probably not too much of a concern at the moment -- pay growth is certainly subdued and it looks like it will continue to be subdued. All of our contacts basically tell us next year’s pay round is going to be like this year’s, and that means settlements around 2-2.5 percent.”

“There’s always the risk of further spikes in commodity prices.”

On the U.K.’s productivity puzzle:

“One way or another, we don’t think it’s plausible to think that this low productivity growth can continue for very much longer. It’s not clear how it will be resolved, whether it’ll be more output or less employment, but one way or another that will probably solve itself.”

On FLS and boosting demand:

“I wouldn’t say QE doesn’t work, you know it’s that it may be less powerful, QE may be less powerful now than it might have been say I think during the immediate aftermath of the collapse of Lehman’s.”

“Although there was obviously a very heightened state of uncertainty then, I think the action that we took probably helped to take out some of the worst tail risks. These things can be very state-dependent.”

“The thing with the Funding for Lending Scheme is of course that, unlike QE where it’s mainly working around the banking system, Funding for Lending obviously is designed to work on the banking system and improve the availability of funds to the banks to reduce the rate at which they have to pay to get funds. Now in that sense I think it’s best to think of it as being complementary to quantitative easing because it’s working through this different channel.”

“But you are right to raise the issue. There may be exactly the same issue on the demand for funds on the part of business. You know if they’re concerned about the degree of uncertainty and that being the dominant factor, reducing the rate that’s being charged may have modest effects.”

On lack of demand for credit:

“You can lead a horse to water but you can’t make it drink. However there will be plenty of businesses for instance who would say, ‘we want to borrow and the banks are offering unacceptable terms or not supplying credit at all.’ So at least if we find out that the banks have made available a lot more funds that’s not taken up we’ll have learnt a bit more about the nature of the problem. The reality is it’s probably a mix of both factors.”

On FLS impact on households, companies:

“It’s certainly true that the initial indications are that it’s feeding through more quickly into lending to households, particularly mortgage availability. The scheme itself doesn’t try to discriminate across different types of lending. If you want to go down that route that’s a route that really only government can do, it’s quite difficult for the central bank to do it.”

“The reason we introduced the Funding for Lending Scheme was particularly to offset an upward drift in funding costs that starting happening in the middle of last year on the back of the deterioration in the euro zone. So it was to redress that particular problem, but then it leaves open to the banks to decide who they make their loans to under normal business criteria.”

“We think there’s reasonably clear signs at least of it feeding through to some degree into lending to households, both in mortgage loan rates but also in our credit conditions survey where there’s been clear signs I think of increased availability of credit but that same survey does support what you say, which is that so far, it’s not so visible on the corporate side.”

“Hopefully, we’ll discover more in the coming months about the kind of impact it’s having.”

“But in an environment where plenty of people say to us the supply of credit is constrained, whether that’s for businesses, especially smaller businesses, or for households who say it’s hard to get loans unless you’ve got a very large deposit, something that frees that up a little bit may just help to add a little bit more demand into the economy and hopefully we can get ourselves into a virtuous circle where the recovery becomes self-reinforcing.”

To contact the reporters on this story: Svenja O’Donnell in London at sodonnell@bloomberg.net; Scott Hamilton in London at shamilton8@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net

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