Bank of England Deputy Governor Charlie Bean said business confidence remains vulnerable and officials should keep open the option to expand stimulus even if its potency is currently diminished.
“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,” Bean said in an interview yesterday. “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 any more of it, it just means that to get the same effect, actually you have to do even more than before.”
Bean, who is extending his term by a year to assist with Mark Carney’s debut as governor in July, spoke while returning by train to London after a two-day visit touring businesses and gauging confidence among executives around central England. He said that the British economy is probably growing “weakly at best” and one-off factors mean it might contract in the current quarter, threatening to hurt sentiment.
“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,” Bean said. “All we can do is keep trying to restate this message that there will be this temporary factor depressing growth in the fourth quarter and hope that that gets across.”
There should be fewer distortions in the first three months of 2013 and that will help provide a “cleaner read” on the economy’s underlying growth, he said during the journey from Birmingham to London. It was the final leg of a trip which had culminated in a lunch with accountants in Worcestershire.
Bean, 59, spoke a day after the U.K. government announced the appointment of Carney, the Bank of Canada chief, to be Mervyn King’s successor as Bank of England governor. The deputy governor will extend his term for a year to assist with the transition.
He said the euro area still remains the “biggest downside risk” to the U.K as “there is always the risk of disorderly unraveling.”
“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,” he said.
“There’s nothing that we can directly do to affect events outside our shores, whether it’s the euro zone, oil prices or whatever,” Bean said. “All we can do is respond to them when they actually happen.”
The pound weakened 0.3 percent against the dollar today and was trading at $1.6022 as of 12:57 p.m. in London. It was little changed at 80.73 pence per euro. Gilts advanced, with 10-year yields falling the most in almost three weeks, dropping seven basis points to 1.78 percent.
Recent business surveys suggest the underlying economy is growing at a “moderately positive pace,” Bean said, a view which chimed with the information he gained from speaking to firms yesterday.
Bean visited companies in the construction, logistics and manufacturing industries during his trip, in which he also presented the central bank’s latest Inflation Report. Monetary Policy Committee members make at least four of these visits a year, to gauge sentiment and explain the bank’s policy actions.
Bean said that a lot of companies still lack confidence about the outlook to commit to longer-term investment, remaining risk averse. This means the central bank’s Funding for Lending Scheme, which acts in complement to QE by working directly on the banking system, may encounter the same effectiveness problems as asset purchases if uncertainty undermines demand, he said.
Horse to Water
“You can lead a horse to water, but you can’t make it drink,” Bean said. “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.”
Early indications suggest the FLS is having a larger impact so far on lending to households, particularly mortgages.
“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,” he said. That same survey suggests 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,” he said.
Bean also said domestic inflation pressures are “not too much of a concern at the moment.” He added that the central bank’s agents say increases in the 2013 pay round will be similar to this year, at about 2 to 2.5 percent.
“Pay growth is certainly subdued and it looks like it will continue to be subdued,” he said. Still, “there’s always the risk of further spikes in commodity prices.”
In Germany, inflation probably slowed to 2 percent in November from 2.1 percent the previous month, according to the median estimate of economists in a Bloomberg News survey before a report due later today.
The European Central Bank aims to keep inflation in the 17-nation euro region just below 2 percent. The euro-area rate will decline to 2.4 percent from 2.5 percent in October, according to another survey. That report is due on Nov. 30.
Meanwhile in the U.S., a Commerce Department report may show new-home sales were little changed from a month earlier at a 390,000 annual pace in October, a survey of economists showed. The Federal Reserve will release its so-called Beige Book, a regional snapshot of the nation’s economy.