BOE’s Miles Sees ‘Good Reasons’ for Optimism on QE Impact
“Since August, the news on the economic outlook has been overwhelmingly negative,” Miles said in a speech in London late yesterday. “I believe that there are very good reasons for thinking that purchases of government bonds in exchange for money created by the central bank will have an impact on a range of asset prices and will influence the cost and availability of credit to the private sector.”
The Bank of England raised the ceiling for bond purchases to 275 billion pounds ($431 billion) from 200 billion pounds last week, the biggest expansion since the first round of stimulus in March 2009. Governor Mervyn King said the expansion of so-called quantitative easing was a response to what may be the worst financial crisis ever.
Miles said that the outlook for global growth has worsened and sentiment in financial markets has “deteriorated markedly.” He also said recent output surveys suggest U.K. economic growth may be “broadly flat” in the fourth quarter.
The “deterioration of funding conditions suggests to me that asset purchases now could support credit and demand growth,” Miles said. “In conditions of heightened stress in markets, some banks’ lending may become constrained by their ability to raise deposits. If QE generates more deposits for some such banks -- and certainly if it generates longer term funding -- it could have positive effects.”
Stocks rose yesterday after Germany and France set a deadline for a breakthrough in handling the euro-area crisis. German Chancellor Angela Merkel and French President Nicolas Sarkozy put recapitalization of banks at the top of the priority list in a joint declaration in Berlin on Oct 9. Sarkozy said they would deliver a plan by the Nov. 3 Group of 20 meeting. Europe’s Stoxx 600 rose 1.7 percent, while in the U.S., the S&P 500 jumped 3.4 percent.
In a question-and-answer session after his speech, Miles said that while the Bank of England could only continue to monitor conditions external to the U.K. economy, it wasn’t powerless.
“We will be affected by conditions in the wider world and Europe in particular,” he said. “I don’t think we’re powerless.”
Miles said QE can influence the economy via two channels, first through the “impacts on a range of asset prices of the portfolio rebalancing in the non-bank private sector that central bank purchases generate” and second by “potentially” alleviating bank-funding constraints if they exist.
He also said banks must reduce leverage and become “much more robust” to prevent a repeat of the financial crisis.
“But for today monetary policy should be set to help prevent the economy from stagnating and driving inflation to sit persistently beneath the target,” Miles said. “That is why today the bank has started to buy more assets.”
While the bank is targeting gilts in its purchases, that should have “very desirable knock-on impacts” on other assets, including increasing the demand for corporate bonds, Miles said in a television interview broadcast on CNBC’s website today.
“The yields on corporate bonds have actually moved up quite significantly over the past couple of months,” he told CNBC. “We can have quite a substantial affect on bringing down the cost of that corporate debt.”
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