Fisher Says BOE Policy Makers Must Keep Up Economic Stimulus

Bank of England Markets Director Paul Fisher said policy makers must continue to provide support to the British economy as companies and consumers reduce debts and rebuild confidence.

“My policy vote has been driven by the need to continue supporting the required real adjustments -- which still have much to work through -- but cautiously, so as not to risk inflation expectations becoming deanchored,” Fisher said in a speech today in Cardiff, Wales. “Faster growth in the near-term might actually help keep inflation down for a while as productivity growth picks up.”

Fisher, along with Governor Mervyn King and David Miles, was defeated in a push for more stimulus at the May 8-9 meeting of the nine-member Monetary Policy Committee. While the economy returned to growth in the first quarter and Fisher noted today that there are signs of the beginning of a recovery, he said “boom conditions” are still some way off.

“It is likely that growth will continue to be below the previous trend until more of the real adjustments to balance sheets across the economy have been made,” he said. “That includes households, the public sector, banks and other businesses. In my view we are maybe two thirds to three quarters of the way through in each case.”

The pound was little changed against the dollar today and was trading at $1.5109 as of 10:14 a.m. London time.

‘Slow’ QE

Speaking to reporters after the event hosted by the Cardiff Breakfast Club, Fisher repeated his proposal for a potential prolonged period of “slow” bond purchases tied to the economic outlook.

“We should be doing a slow amount of QE over a period of time,” he said. “Twenty-five billion pounds over three months is a slow rate, so that would be what you’d kick off with and then you would stop when conditions were looking a lot better.”

Still, he said he didn’t want the BOE to mimic the Federal Reserve’s position of continuing for an indefinite period.

“It’s sensible to say you’re going to do it for three months, six months, because you get a natural review point,” Fisher said. “I think the Americans are finding it a bit hard as we’ve seen recently to get out because they’ve got this indefinite horizon.”

Rate Cuts

In his speech, Fisher signaled that QE remains his preferred stimulus, saying he’s not convinced about the merit of cutting the key interest rate, already at a record low of 0.5 percent.

“Further cuts in rates may not feed through to higher consumption in the normal way and some of the effects could even be perverse,” he said. “We may well find that getting rates back to normal is part of re-establishing economic activity at potential in due course.”

Barclays Plc economist Simon Hayes in London said Fisher’s view “implies that the chances of a bank rate cut on the arrival of new BOE Governor Mark Carney are rather low.” Carney is due to take over in July after King retires.

Fisher also defended the BOE’s quantitative-easing program -- through which it has bought 375 billion pounds ($566 billion) of bonds -- and said external factors were mostly to blame for above-target inflation, citing energy prices and the depreciation of the pound. He added that he has been more concerned about the risk of deflation in the past five years.

Consumer-price growth was 2.4 percent in April, its 41st straight month above the 2 percent goal, and the BOE forecasts that it will only slow to the target in the second half of 2015.

“If QE has contributed to inflation still being somewhat over target, that seems to me a much better outcome than the alternative of a deeper recession and a greater risk of deflation,” Fisher said.

“We have had our critics over the past few years and an open debate on monetary policy is to be welcomed,” he said. “But I have not heard anyone suggest a more convincing or attractive policy stance.”

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