BOE’s Fisher Sees Need for a Longer Run of QE at Slower Pace
Bank of England policy maker Paul Fisher said he favors a more prolonged period of asset purchases at a slower pace in a program that would be guided by the economic outlook.
Explaining his decision to vote for 25 billion pounds ($38 billion) of additional quantitative easing this month, Fisher said in a speech that the Monetary Policy Committee should consider more bond buying “under a slightly different dynamic approach.”
“This could be the first instalment of a more prolonged run of purchases at a somewhat slower pace than previously, and with a relatively modest addition to the total by the end,” he said yesterday in London. “If we were to do that, then it would be straightforward to accelerate or to stop purchases as the economic outlook developed and the risks became clearer.”
Fisher, with David Miles and Governor Mervyn King, was defeated in a push for more QE this month as the MPC discussed a range of measures to nurture a recovery. Fisher’s proposal for more prolonged bond buying tied to the economic outlook echoes the Federal Reserve’s policy of linking stimulus to thresholds such as labor-market developments, and comes amid a debate on tools sparked by Bank of Canada Governor Mark Carney.
“It is sustained momentum that the economy needs now rather than emergency action,” Fisher said.
The economy is flat, not contracting, meaning the risk of deflation is “considerably reduced,” he said. “A slower, more gradually supportive policy might be more appropriate and less risky to nurse the economy through the next phase of recovery.”
The pound fell 0.15 percent against the dollar from yesterday and traded at $1.5103 at 7:51 a.m. in London.
With Carney -- who will succeed King in July -- having signaled support for the BOE using greater forward guidance as a tool, Fisher said this is a “very live” debate. He added that the BOE already does this, noting its decision to “look through” above-target inflation to aid the economy.
“In the U.K., market expectations are already consistent with monetary policy remaining very supportive for some time to come,” he said. “Yet there is still a debate about whether the MPC should give more ‘forward guidance.’ In practice we have being doing this through the Inflation Report. The most recent edition makes it clear that we do not see much pressure arising from domestically generated inflation.”
Fisher’s comments came hours after BOE officials testified at a Parliament hearing in London on the economic outlook. At the hearing, Deputy Governor Paul Tucker said he has raised the topic of negative interest rates at MPC meetings.
Simon Hayes, an economist at Barclays Plc in London, said while he has “reservations” about MPC momentum toward open- ended QE, there is “little doubt that something is afoot.”
“Whether it is the imminent arrival of Mr. Carney, or simply frustration with the pace of recovery, the MPC is thinking hard,” Hayes said. “It may take some time for a consensus to materialise around what measures might prove most effective. However, a policy of do-nothing seems like an increasingly undesirable and unlikely outcome.”
The MPC’s discussion on measures comes as the economy struggles to recover. Gross domestic product probably fell 0.3 percent in the fourth quarter, economists said before a report due at 9:30 today. The second estimate of GDP will include data on consumer spending, government spending and exports for the period.
Fisher, who is markets director at the BOE, also said yesterday that while the central bank’s Funding for Lending Scheme has been “remarkably successful” in reducing bank funding costs, the impact on loan rates for customers has been slower.
“We do need to keep the pressure on the banks individually and collectively to make sure that they continue to pass through lower funding costs and are lending where they can,” he said. The BOE “has made the funds available to support lending to U.K. households and businesses, it is up to the banks to deliver.”
The impact of the FLS on credit growth is the “most uncertain leg,” according to Fisher, who said he “would not expect to see a return to rising aggregate quantities until we start getting data for 2013 at the earliest.”
“Nevertheless, it does seem that we have the beginnings of a revival in mortgage activity,” he said.
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