Bank of England Deputy Governor Charles Bean said consumers’ and businesses’ concerns about the outlook may undermine the impact of quantitative easing, in remarks one week before officials’ next decision on stimulus.
“Looser monetary policy works in large part by encouraging households and businesses to bring forward future spending to the present,” Bean said late yesterday. “It is plausible, however, that such intertemporal substitution will be weaker when uncertainty is elevated and when banks and some households are concentrating on repairing their balance sheets.”
Speaking at the University of Hull, England, Bean gave an overview of the measures the Bank of England has implemented to battle the recession and said the financial crisis showed that policy makers “knew less than we thought.” His comments come as the central bank prepares to publish as soon as this week independent reviews into its response to the turmoil and the Monetary Policy Committee’s forecasting capability.
The past five years have been “a challenging, but humbling experience,” Bean said. “As a result of the crisis, we have found ourselves providing liquidity support in unexpected ways, deploying unconventional monetary policies in alien circumstances, and developing a whole new lexicon of macro prudential policies.”
The Bank of England unveiled a 50 billion-pound ($81 billion) round of asset purchases in July, and policy makers will decide on Nov. 8 whether to expand stimulus again. Bean said while QE has pushed down long-term yields, a “more open question” is the “degree of traction these lower yields have on demand at the present juncture.
‘‘Uncertainty about the outlook for demand is far and away the dominant factor’’ on businesses, he said. ‘‘That does not mean that quantitative easing is impotent, as demand will still be affected by the wealth effect from the higher asset prices, as well as by any related exchange-rate depreciation. But I think there are reasons to believe the effect of lower yields may be weaker than usual.’’
Barclays Plc said Bean’s comments reinforce their view that he will vote for no change to policy next week. It forecasts that the target for bond purchases will be kept at 375 billion pounds.
‘‘While his comments seem to justify the exceptionally loose monetary policy stance so far, it appears that he is increasingly reluctant to provide further stimulus,’’ said Blerina Uruci, an economist at Barclays in London.
The pound rose for a third day against the dollar, advancing 0.2 percent to $1.6154 as of 8:10 a.m. in London. Government bonds declined, with the yield on the benchmark 10- year gilt rising 3 basis points to 1.88 percent.
Bank of England Governor Mervyn King said last month that he doesn’t have concerns about the bank’s scope to add to bond purchases. On the question of the effectiveness of QE, he said that while its direct impact on gilt yields may be reduced as sovereign borrowing costs decline, raising the price on other assets is an ‘‘equally important” objective.
Bean rejected the argument that the central bank should cancel the gilts it holds through its QE program to reduce government debt. This would deny the bank the assets needed to sell back to investors and withdraw bank reserves to unwind the policy, he said.
“It would also deprive the bank of the wherewithal to pay the interest on the reserves in the meantime, so we would need either to keep bank rate perpetually at zero or else be willing to continue issuing additional reserves indefinitely in order to meet our obligations,” he said. “One can easily see how this would eventually lead to inflation taking off.”
Commenting on data last month showing Britain exited a recession in the third quarter with the strongest growth in five years, Bean noted it was “boosted by one-off factors.”
There’s ‘not quite as much good news as there might be on face of it,’’ he said. While the data was “welcome news,” it will be “some time before the post-crisis adjustment is complete.”
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