Bloomberg News

Dale Says BOE Can Increase QE in Response to Europe’s Crisis

December 13, 2011

(Updates with comments from interview starting in sixth paragraph.)

Dec. 13 (Bloomberg) -- Bank of England Chief Economist Spencer Dale said the central bank is prepared to add further stimulus if needed as economic growth stalls and the unresolved euro debt crisis threatens the outlook.

“The near-term outlook has weakened very materially,” Dale said in a speech in London today. “Although the precise reasons why the economy appears to have slowed are uncertain, and we can’t rule out some intensification of domestic headwinds, the most likely explanation would seem to be the growing fallout from the euro area as it has lurched from one mini crisis to another.”

The Bank of England increased its target for bond purchases by 75 billion pounds ($117 billion) in October and some policy makers have said more may be needed after the central bank cut its growth and inflation forecasts last month. While European leaders agreed to a new plan to stem the region’s debt crisis last week, Dale said it’s still not clear if that will prove to be a “credible response.”

The outlook for the U.K. “depends on the euro zone being able to implement a credible and effective response to the substantial challenges it faces,” he said. “Failure to do so poses the single biggest threat to our recovery.”

Inflation Slows

U.K. data today showed inflation slowed to 4.8 percent in November from 5 percent in October, which compares with the central bank’s 2 percent target. Dale said he sees inflation easing sharply in the first half of 2012 and forecast it will be just above 3 percent by March.

“Inflation is starting to slow and I think what we should see is a very sharp slowing in the first quarter of next year,” Dale said in an interview with Maryam Nemazee and Linda Yueh on “The Pulse” on Bloomberg Television. “There are some very large base effects, they will stop adding to inflation in the first quarter of next year. So I expect inflation to slow sharply next year.”

“What’s far more uncertain, and far more important for monetary policy, is how fast inflation slows beyond the first quarter,” he said in the interview. “There’s two reasons why high inflation could constrain more QE; the most important one is that although we understand why it’s so high at the moment, our understanding of inflation dynamics is not perfect.”

“While the direction of travel is clear, inflation is falling, it’s starting at a high number.”

Stimulus Scope

Dale said in his speech that the central bank’s decision to buy government bonds in a program known as quantitative easing doesn’t mean it is “any less determined” to meet its inflation target.

The Bank of England is more than halfway through its current round of QE and Dale said there is “certainly scope, if necessary, for us to increase our program of asset purchases.” Still, he added that there are “limits to what domestic monetary policy can do to insulate our economy from such external events.”

“Sluggish economic growth in the first half of the year appears to have stalled more recently,” Dale said. “I expect that developments within the euro zone will continue to have an important bearing on our economic fortunes for some time.”

He said in the interview that he has “no idea what we’re going to need to do” in terms of stimulus as the outlook for the economy remains “very uncertain.”

European leaders announced last week a blueprint for a closer fiscal union and tighter rules on borrowing to try to end the debt crisis. The plan, unveiled in the shadow of a downgrade threat from Standard & Poor’s, includes a faster start to a 500 billion-euro ($659 billion) rescue fund for the euro area.

--With assistance from Maryam Nemazee, Linda Yueh and Scott Hamilton in London. Editors: Fergal O’Brien, Simone Meier

To contact the reporter on this story: Jennifer Ryan in London at

To contact the editor responsible for this story: Craig Stirling at

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