Tucker Says He’s Open to QE as BOE Stresses Flexibility: Economy
Bank of England Deputy Governor Paul Tucker said he’s open to adding to asset purchases as policy makers stressed the central bank has the flexibility to expand stimulus if needed.
Tucker was testifying alongside policy makers David Miles, Charlie Bean and Ian McCafferty at a Parliament hearing in London today on the BOE’s latest quarterly forecasts. The BOE has said it will “look through” a period of above-target inflation to keep nurturing growth, which Bean said “made sense” in the current environment. Tucker also raised the prospect of negative interest rates at the hearing.
Tucker’s comments signal a potential willingness to join Governor Mervyn King, Paul Fisher and Miles, who were defeated in a push for more bond purchases at the Monetary Policy Committee meeting this month. With incoming Governor Mark Carney having sparked a debate on how far central banks should go to help economies, Tucker said quantitative easing wasn’t necessarily at an end and that the MPC hadn’t dismissed other stimulus measures.
“Nobody on this committee thinks that QE has reached the end of the road and that it’s not a useful instrument any more,” Tucker said.
In a written testimony published today, he said the existing 375 billion pounds ($568 billion) of asset purchases by the BOE “is likely to gain more traction on spending than it had last autumn, given reduced tail risks from the international environment.”
“I remain open to doing more QE depending on the outlook for demand and inflation,” Tucker said.
Tucker also told lawmakers that while the risk from the euro area had receded, it remains “a major threat.” McCafferty echoed the remarks, saying while the worst of the debt-crisis tensions have eased, the region is still facing risks.
Concerns over Europe’s crisis were triggered afresh this week after election results in Italy proved inconclusive, marking a rejection of austerity measures and creating a potential political vacuum of at least a month. Italian bonds and stocks tumbled.
U.K. government bonds rose today as the Italian election boosted demand for the relative safety of British sovereign debt. The yield on the 10-year gilt dropped eight basis points to 2 percent as of 3:41 p.m. London time. The pound weakened 0.1 percent versus the euro.
Asked about other possible stimulus measures, Tucker said he has raised the idea of negative interest rates at MPC meetings. Officials have previously discussed the possibility of cutting their benchmark rate from a record-low 0.5 percent, though they have said such a move has drawbacks.
“We’ll continue thinking about” policy options, Tucker said. “I hope we will think about whether there are constraints to setting negative interest rates. This is an idea that I have raised. This would be an extraordinary thing to do and it needs to be thought through very carefully.”
The MPC is maintaining stimulus to help the U.K. economy recover from a recession at a time when inflation is above the 2 percent target and forecast to remain there for another two years. Tucker, echoing King’s words at the Inflation Report press conference earlier this month, said policy makers should look through the period of elevated inflation.
“It is consistent with the MPC’s remit to look through a period of above-target inflation, so as to avoid derailing the recovery, provided that medium-term inflation expectations are anchored,” he said in his written testimony.
A report today showed an index of U.K. retail sales fell more than economists forecast to a five-month low in February. The statistics office will publish its second estimate of fourth-quarter gross domestic product tomorrow, including data on exports, consumer spending and government spending.
While U.K. consumer-price growth was at 2.7 percent in January, Bean said this was partly due to administered prices.
“Some of the cost shocks we’re being subjected to -- in the area of regulated prices and education -- will take longer to pass through, so it makes sense to talk about getting inflation back to take longer,” Bean said.
McCafferty also supported the idea of looking through the surge in price growth, saying that the central bank has had to exercise flexible inflation targeting over the past few years.
“We have to deliver over the medium term a low and stable inflation rate, but at the same time a stable growth picture,” he said.
The lack of economic growth in Britain has undermined Chancellor of the Exchequer George Osborne’s deficit-reduction plans. Moody’s Investors Service stripped the U.K. of its top credit rating on Feb. 22, citing the “continuing weakness” of the economy and its implications on fiscal consolidation.
Bean said that investors were expecting a downgrade and “possibly other rating agencies may follow suit.” Still, he said it reflects the economic backdrop and doesn’t “in and of itself add anything new.”
In the U.S. later today, Federal Reserve Chairman Ben S. Bernanke will deliver his semiannual testimony on monetary policy to the Senate Banking Committee in Washington. Also in the U.S., the New York-based Conference Board will probably say its sentiment index rose to 62 this month from 58.6 in January, according to a survey of economists.
Elsewhere in Europe, Finland’s jobless rate rose to 8.7 percent in January from 6.9 percent in December and Hungary’s November-January rate increased to 11.2 percent from October- December’s 10.7 percent. Singapore’s industrial production unexpectedly declined in January as demand for electronics and pharmaceuticals faltered.
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