Feb. 29 (Bloomberg) -- Bank of England Deputy Governor Paul Tucker said policy makers must be ready to “gradually” withdraw stimulus when the U.K. economy strengthens.
“We must be alert to the need gradually to withdraw stimulus as and when recovery builds,” Tucker said in a speech in London late yesterday. “Stimulus can be sustained only so long as medium-term inflation expectations remain anchored” to the central bank’s 2 percent target, he said.
The Bank of England’s Monetary Policy Committee agreed this month to increase the size of its emergency bond-purchase program by 50 billion pounds ($79.5 billion) after the economy contracted in the fourth quarter. Tucker, along with Governor Mervyn King, will answer lawmakers’ questions on the central bank’s decision and its economic outlook at a parliament committee hearing later today.
Tucker, who also sits on the central bank’s Financial Policy Committee, rejected arguments that policy makers should ease restraints on banks to aid lending, citing the “lingering threat of a severe crisis in the euro area” that has left banks in an “extraordinarily risky environment.”
“While in other circumstances it might have been possible to relax capital requirements if the worst had passed, it is not a sensible course when the worst might still lie ahead,’ he said. ‘‘In current circumstances, gradually building resilience through retained earnings is best for stability and recovery.’’
Policy maker Ben Broadbent said late yesterday that the debt crisis remains the biggest risk to the U.K. even after ‘‘important’’ steps by euro-area officials to tackle it.
‘‘There was some important policy decisions taken in Europe at the end of the last year; support was provided for the banks and that’s been very important,’’ he said in an interview with Belfast-based Ulster Television, referring to the European Central Bank’s long-term loans. ‘‘Over time the situation will improve. But I don’t think we should imagine, hopeful as it is, that these more recent policy actions have solved everything. There are risks that still remain.”
Tucker is due to speak at the Treasury Select Committee in London starting at 9:45 a.m. He will be joined by King, Deputy Governor Charles Bean and policy maker Adam Posen.
Tucker said late yesterday that while monetary policy must help underpin demand, it may prevent the tackling of economic imbalances.
“We must be alive to the possibility that the alleviation of current macroeconomic problems could sow the seeds, somewhere in the financial firmament, of the next set of imbalances,” he said. “Where risks to stability do emerge, we must use what other instruments we have to try to temper them.”
Countries must become less reliant on central banks “mopping up” after financial crises and should have “macro regimes that aim to make chronic imbalances and over-indebtedness less likely and less threatening,” Tucker said.
In this regard, Britain has a “special responsibility” to maintain the resilience of its domestic financial system due to its central role in international finance, he said. Government finances “should be managed with an eye to the nature and extent of risk exposures elsewhere in the economy.”
The Bank of England’s quarterly forecasts published this month show the government’s budget cuts and the crisis in Europe will weigh on growth, though slower inflation will help support a recovery. Annual consumer price gains slowed to 3.6 percent in January, the least in 14 months.
Minutes of U.K. policy makers’ decision to expand their bond-purchase plan on Feb. 9 showed Posen and David Miles were defeated in a bid for a 75 billion-pound increase in stimulus, while Tucker voted with the majority. Their colleague Paul Fisher said on Feb. 26 that the risk of the U.K. slipping into another recession may have been avoided and further signs of strength would add to the case for ending new bond purchases.
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