Deputy governor Paul Tucker told MPs he was open to more quantitative easing, depending on the outlook for growth
A top Bank of England policymaker hinted on Tuesday that he and most other members of the monetary policy committee (MPC) were prepared to inject further funds into the economy through the central bank’s policy of quantitative easing (QE).
Speaking to MPs on the Treasury select committee, deputy governor Paul Tucker said: “I remain open to doing more QE, depending on the outlook for demand and inflation.
“Nobody on the committee thinks that QE has reached the end of the road and that it is not a useful instrument any more. We stand prepared to do more, if we judge that necessary,” he said.
Challenging critics who have derided the positive effects of QE, Tucker said the MPC believed QE continued to benefit the economy and without it lending would be more restricted. “We are absolutely committed to supporting growth within the constraints of keeping inflation to its medium-term target.”
David Miles, a former City economist and external member of the MPC, told MPs he was prepared to allow inflation to rise further above its 2% target in the short term to support growth, though it was his view that prices would be unaffected by a further boost to QE.
Meanwhile in the US, Federal Reserve chairman Ben Bernanke strongly defended the Fed’s QE programme, which he said had been essential for the stock market’s recovery. “To this point, we do not see the potential costs of the increased risk-taking in some financial markets as outweighing the benefits of promoting a stronger economic recovery and more rapid job creation,” Bernanke told the Senate banking committee.
The Fed is buying $85bn (£56bn) in bonds each month and has said it plans to keep purchasing assets until it sees a substantial improvement in the outlook for the labour market.
Tucker also admitted that cheap loans funded by the central bank were failing to reach small businesses, undermining a key policy to drive growth.
He said successive schemes designed to boost lending to small businesses had failed to reach their target after the majority of loans offered as part of the central bank’s £80bn funding for lending scheme went to homebuyers.
Forcing high street banks to accept negative interest rates when they deposit money with the central bank was another idea that was considered, he said.
Tucker, who lost out to the Canadian Mark Carney in the race to succeed Sir Mervyn King as governor of the Bank, said he favoured a plan to encourage major corporations, which are flush with cash, to offer loans in partnership with the central bank to bypass the ailing banking sector.
“I am worried, and this is a personal opinion, that the current battery of credit policies are not reaching small and medium-sized businesses at the moment,” he said.
Andrew Tyrie, chair of the Treasury select committee, said: “The lack of lending to SMEs is inhibiting economic growth in the UK. The MPC is right to be looking at additional tools, or changes to existing tools, that could help.”
Ray Boulger of mortgage adviser John Charcol said negative interest rates would result in losses for banks that kept money on deposit with the Bank of England, increasing the pressure to lend to private borrowers. He said the mortgage market would be a major beneficiary of any such action.
“This increases the likelihood of genuine cuts in 2 year fixed rates, with the scope for more cuts in longer term rates as well.”
However, the MPC is most likely to increase QE before adopting alternative policies. Threadneedle Street has pumped £375bn into the financial system over the last four years through QE and there is a growing expectation that the MPC will increase the amount to £400bn sometime in the spring. At the last meeting, three MPC members, including King, voted to increase QE by £25bn.
Most UK economic indicators have turned south in recent weeks, wiping out hopes that the UK would recover strongly after four years of intermittent low growth and recession. Many City economists believe the UK will avoid a triple-dip recession despite a 0.3% contraction in the last three months of 2012, though growth will remain weak. A recession is defined as two consecutive quarters of falling output.
The credit ratings agency Moody’s, which strippd the UK of its AAA credit status at the weekend, warned that growth will be low for at least three years, hampering the government’s ability to reduce the annual deficit.
Tuckers admission that small businesses were missing out on cheap loans follows figures showing that most of the initial funds from the funding for lending scheme have been snapped up by homebuyers.
The scheme, which was launched last year in a fanfare by the chancellor and King, has struggled to make an impact and has failed in recent months to reverse a slowdown in lending by banks.
The new scheme would involve corporations packaging loans to small businesses, possibly suppliers, as “working capital instruments” with the backing of the central bank.
Analysts said Tucker was floating ideas that may not come to fruition for more than a year, but gave markets analysts an insight into policymaking at the bank.
In a separation submission to the committee, the bank’s other deputy governor, Charles Bean, said in a separate report to MPs that he expected the British economy to improve gradually, helped by an improvement in financial markets.
“At present, my expectation is that growth will gradually strengthen this year and next on the back of that, a further easing in credit conditions, and an improvement in the global environment. But downside risks remain, especially in the euro area,” he said.
Canadian drops strong hints of new approach at Davos as pressure increases on government over flatlining economy
The man hand-picked by George Osborne to run the Bank of England has fuelled speculation that he will order a policy revolution to jump-start the stalled British economy as fears grow of a triple-dip recession.
Speaking at the World Economic Forum in Davos, the Canadian Mark Carney, who will take over from Sir Mervyn King in July, hinted strongly at a new approach when he said that central bankers should be prepared to take aggressive measures to help economies achieve what he called “escape velocity”. “There remains considerable flexibility – which includes the use of communications, which includes the use of unconventional measures,” he said.
In the US, the Federal Reserve recently made a public pledge to keep stimulating the economy by printing money until the unemployment rate falls to 6.5% – an approach rejected by the outgoing King.
While UK interest rates have been at a record low of 0.5% for almost four years, and the Bank has already pumped £375bn into the economy, Carney insisted central banks’ policy options were still far from exhausted.
Carney’s reputation has soared during his time as governor of the Bank of Canada – one of the biggest world economies to have escaped the global crash without suffering the fallout endured by countries such as the UK.
Although he was speaking generally rather than singling out the UK, Carney’s comments will nonetheless be seen as evidence that he is preparing a substantial change of direction when he takes up his new post.
Suggesting that he might act quickly – perhaps with a pledge to hold interest rates low for a prolonged period – he said: “Monetary policy can be more nimble than fiscal policy.”
Some economists, frustrated by the slow pace of recovery and what they regard as the conservatism of King, have recently called for more radical action from the Bank, such as direct lending to small businesses.
Osborne, who was in Davos when Friday’s grim GDP figures were announced, has come under mounting pressure to moderate his deficit-cutting plans, to ease the pressure on the flatlining economy.
Business secretary Vince Cable is also leading calls within the coalition for action to increase spending on infrastructure, to help kickstart the economy into life. Deputy prime minister Nick Clegg has already suggested the government may have been wrong to slash capital projects so quickly after coming to office in 2010.
Jim O’Neill, chairman of Goldman Sachs Asset Management, added his voice to the chorus of criticism, telling the BBC: “Based on my business experience, if what you thought was not delivering what you expect to be the outcome, surely you have to change what you thought a little. At a minimum, a repositioning of the stance, if not a full change.”
Meanwhile, some business leaders expressed concern that David Cameron’s pledge to call on an in-out referendum on EU membership might further harm the economy.
Sir Andrew Cahn, former chief executive of UK Trade and Investment, and now vice-chairman of the Japanese bank Nomura, said in Davos that he believed there was already “a chill” in the attitudes of some investors towards Britain.
A Nissan spokesman at the carmaker’s headquarters in Yokohama said: “We’re a global company and Europe is a vital part of our volume, so we’d like to ensure that our business can operate in Europe as freely as possible.
“We’ve invested £3.5bn in the UK since our Sunderland plant opened in 1986. It’s a highly successful plant and 80% of volume from there is exported [mostly to continental Europe]. We would welcome policy decisions that continue to support that success.”
Nouriel Roubini said at Davos that central bankers risked saddling the economy with debt-burdened QE addicts
Nouriel Roubini, the economist dubbed “Dr Doom” for predicting the credit crunch, has sounded a stark warning about the long-term effects of relying on quantitative easing to keep crisis-hit western economies afloat.
At a lively debate in Davos, Roubini, who runs a New York-based consultancy, said central bankers risked saddling the economy with debt-burdened banks, businesses and consumers that should have been allowed to go bust.
“Over time, you get zombie banking, zombie corporates, zombie households, which is damaging in the long term,” he said. The phrase “zombie banks” was coined in Japan, to describe insolvent lenders propped up by cheap cash.
Roubini stressed that “QE” had been critical in fending off a new Great Depression after the collapse of Lehman Brothers in 2008. But, asked to argue against the motion, “The short-term benefits of QE outweigh the long term risks,” he offered nine reasons why such unconventional monetary policy could damage the economy in the longer term.
Roubini went head to head with Adam Posen, the outspoken former member of the Bank of England’s monetary policy committee, who pushed for an extension of QE during his time in Threadneedle Street.
Posen said central bankers should be “humble” about what they can achieve but there was no evidence from the past five years that QE was sowing the seeds of a future crisis. And in response to the increasingly widely aired argument that QE could lead to a Japanese-style economic stagnation, he said: “If you look accurately at the data, being Japan wasn’t so bad: in the five years to 2007, per capita growth in real GDP was higher than anyone else in the G8.”
Instead, Posen said opposition to QE in the current circumstances could only come from a “deep spiritual belief that somehow this must create inflation”.
However, Roubini argued that even if the policy was beneficial today, there could be unintended consequences if central bankers misjudged their “exit strategy”. He was critical of the Federal Reserve’s recent promise to keep buying bonds until unemployment sinks to 6.5%, for example, saying that policymakers may have misjudged how far the jobless rate can fall without sparking inflation.
Roubini also warned that the more unconventional central bankers’ approach becomes, the more they are jeopardising the inflation-targeting regime that has served the world well over the past 20 years.
“You’ve got QE2, QE3, soon you’ll have QE infinity: what’s going to happen to the regime of monetary policy? Most countries had inflation targeting; now the UK is talking about throwing it away: what’s going to be the new anchor? How are we going to anchor people’s expectations of inflation over time?”
Mark Carney, who will take over as Bank of England governor this summer, has floated the idea of a “nominal GDP” target, that could force central bankers to take more aggressive action to boost growth, and George Osborne has also expressed interest in the idea.
Economists are divided about the lessons that should be learned from the response to the crisis of the past five years – and how quickly the world’s central banks should start withdrawing the emergency measures they have been using to contain the impact of the financial crisis and its aftermath.
In the UK, the minutes from the latest meeting of the Bank of England’s monetary policy committee, published on Wednesday, showed that one of its nine members – David Miles – would still like to see QE extended further, by another £25bn. However, Sir Mervyn King warned in a speech on Tuesday night against relying too heavily on central bankers to rebuild the battered UK economy.
In Davos on Wednesday, despite Roubini’s prohecies of doom, the clash of economists ended up with more than 60∞ of the audience of policymakers and academics backing Posen, and agreeing that the short-term benefits of QE are worth the long-term risks.
Japanese banks are by some measures in better shape than their UK counterparts, but the rest of the economy is looking decidedly shaky
First Britain was compared to Greece – sunk by debt. Then when the worst of the financial crisis passed and a battered exchequer was still solvent, Britain was likened to another capitalist basket case – Japan.
With two lost decades under its belt, Tokyo is considered the capital of stasis, a place where nothing grows.
Hardly a week goes by without someone arguing that Japan’s lack of growth, its ageing population, massive debts or its strong currency spell the end of a renaissance that propelled the country into the first rank during the 1970s.
To many people the situation remains benign. If you are happy with your domestic situation, job and income, an economy that is going nowhere does little to provoke the forces of change. So far outside investors have adopted a similar view.
However, not everyone is content.
The traditional prop for a government that repeatedly spends more than it generates in taxes, is the Japanese saver. They put their money aside to lend to their own government. Japanese government bonds (JGBs) are famously 95% owned by Japanese investors (who believe misguidedly that it is better to get a return on loans to the government than pay tax, which has no return).
Japan’s savers have been ageing for some time. Every year there are fewer people putting money aside. In recent times the banks have made up the difference, but this has only made the situation worse as they tie themselves to the fortunes of the government in an ever-closer union.
Polls this week showed the refusal to pay enough tax persists and voters are turning to opposition leader Shinzo Abe’s plans to unleash unlimited amounts of free cash to push inflation up to 3% and interest rates below 0%.
This free cash is printed by the central bank and will flood the Japanese financial markets in the hope that some people will spend it. It is a scheme that has worked in the US, but in Japan is more likely to mimic the Bank of England’s quantitative easing programme, which has flopped as a spur to growth. In the UK, the people who benefit – those who discover their debt payments are cheaper – tend to hoard the savings while those without debts find their income cut as savings interest declines. All the new money gets swallowed by the banks, which are grateful because they are also suffering terribly, and recycled back to the government.
Japanese banks are by some measures in better shape than their UK counterparts, but the rest of the economy is looking decidedly shaky.
Exports fell in October by 6.5% on the previous year (imports dropped by 1.6%). Exports to the EU are down 20%, while exports to China have slumped by 11.6%, in part due to tensions over disputed islands in the East China Sea. Sony, Panasonic, Sharp are on the slide along with much of the tech sector.
Worse, domestic consumption dropped 0.5% and capital expenditure fell 3.2%, both registering the second-largest falls since the height of the 2008-09 recession.
Graham Turner at GFC Economics says Japan stands on the brink of an almost complete reversal in fortunes. After years of rising spending and debt, supported by domestic and foreign lenders, the government could find itself spiralling downwards.
He says: “The determination of the government to beat deflation via a loose fiscal policy could be the tipping factor, which drives the current account deeper into deficit. In this respect, Japan may begin to mirror the peripherals of the eurozone, prior to the euro crisis, where a loose fiscal policy goes hand in hand with poor external fundamentals.”
The poor external fundamentals he refers to are the lack of demand for Japanese goods and the increasing unease of foreign lenders at Japan’s plight. Already the interest rate the government pays on its debt has risen. It doesn’t need to go up by much to add billions of pounds to the bill.
George Osborne is also looking at rising debts and zero growth. He is relying on the Bank of England to create growth with money created in the bowels of Threadneedle Street. We didn’t want to follow Greece, and we don’t want to be the next Japan. If we continue on the same path we will undoubtedly have the same outcome.
With inflation outstripping wages and a raft of benefit cuts to due in 2013, household incomes are likely to shrink, analysts warn
The Bank of England will resist calls this week to pump extra funds into the economy despite concerns that a recent decline in manufacturing production and the weak construction sector could force the UK into a triple dip-recession. Policymakers at the central bank will debate how to generate growth after more than three years of falling living standards.
With inflation consistently outstripping wages and a raft of cuts to benefits due in 2013, household incomes are likely to worsen, according to economists.
The bank’s monetary policy committee (MPC) is likely to keep its powder dry after the economy briefly sprang back to life in the third quarter when gross domestic product (GDP) grew 1%.
A fall in unemployment in autumn and a modest rise in consumer spending have also offset worse-than-forecast manufacturing output, which has shrunk as the government’s austerity policies and the euro crisis hit demand for UK goods.
While some MPC members could vote to boost quantitative easing (QE) by £50bn to £425bn, most economists expect a committee majority to keep interest rates at a record low of 0.5% and QE at £375bn.
Both the BoE Governor and deputy governor, Sir Mervyn King and Paul Tucker, have suggested in recent speeches that the impact of QE is reaching its limit.
Howard Archer, chief UK economist at IHS Global Insight, said: “While it still looks to be a close call, we believe the 1% quarter-on-quarter spike in GDP in the third quarter makes it more likely than not that the Bank of England will hold off from more QE.”
Members of the MPC have come under intense pressure to cut the cost of lending and boost credit in the economy as the Treasury maintains its determination to limit government to pay down debts.
The MPC has waited to complete its last £50bn of government bond purchases and a new direct-funding scheme for banks (funding for lending), before pushing ahead with another £50bn of QE.
Economic analysts, the CEBR, said the economy will remain weak in 2013 and 2014, though it will outstrip the eurozone as it copes with the double whammy of sharply declining incomes and rising debts in several key countries. The CEBR said the UK would grow by 0.8% next year and 1.4% in 2014 against a eurozone average of -0.4% in 2013 and 0.4% in 2014.
“Even assuming the problems of the euro do not cause an economic meltdown before the German elections next year, we are looking at a very weak economic outlook in Europe for the next two years” said Tim Ohlenburg, senior economist at CEBR and main author of the report.
However, the UK could fall back into an unprecedented third recession in four years if the 1% rise in the third quarter proves to be an Olympics-induced blip.
The latest ICAEW/Grant Thornton UK business confidence monitor found smaller UK firms had scaled back plans for expansion in 2013.
The report noted that a mood of caution suggests while some sectors and regions start to improve, “economic recovery will be restrained in the next 12 months”.
Michael Izza, chief executive of the accountancy body, the ICAEW, said: “While the UK economy has come out of recession, business confidence is still very fragile. Against a backdrop of a softening global economy, the recovery is yet to take hold. More needs to be done to secure the UK’s long-term economic outlook by encouraging businesses to invest and to stimulate growth.”
A survey of small businesses found that almost half were reluctant to invest in new jobs while confidence in the economy’s ability to recover remained weak. The eurozone will slow the UK’s recovery next year as the 17-member currency zone deals with a huge overhang of debts in Greece, Ireland, Portugal, Spain and Italy.
Greece is due to vote on €13.5bn of spending cuts and tax rises on Wednesday ahead of a budget vote next Sunday.
Prime minister Antonis Samaras is confident he can win the vote to secure more than €37bn (£30bn) of loans from the EU and International Monetary Fund.
Policy of printing money unlikely to help economy says Bank of England’s Paul Tucker
Quantitative easing has “lost its bite” according to leading Bank of England policymaker Paul Tucker, who said the policy of printing money was unlikely to have a major impact on the economy.
Tucker, who is a deputy governor of the central bank, warned that “there are no silver bullets” in Threadneedle Street’s armoury.
He also said the monetary policy committee, which sets interest rates, wanted to make credit cheaper, but was wary of adding to the £375bn of quantitative easing (QE) in case it triggers a rise in inflation.
The downbeat assessment of QE will cheer some analysts in the City who believe the scheme is having little effect on the ability of banks to lend, especially to small businesses.
A report by the economic thinktank, the CEBR, found that the main beneficiaries of QE were mortgage payers, who rejected spending the money in favour of paying down their mortgages.
The Treasury is relying on QE to increase the amount of money available for spending to offset the effects of its austerity programme.
Tucker is a fan of the central bank’s latest scheme, called funding for lending, which offers cheap funds to banks if they agree to pass them on directly to customers, but he counselled against expecting a dramatic effect from this scheme to increase lending.
Tucker, who is a contender to replace Bank of England governor Sir Mervyn King when he steps down next year, told Euroweek magazine: “In 2009, QE played a very important role in helping to avert disaster. There is an understandable debate about the distributional effects of QE, but without it, everybody would have been a lot worse off.
“The economy has moved sideways for a few years, which is uncomfortable for everybody. But it is much better than sliding into some modern version of the Great Depression.
“We still think QE works, even if in some respects it does not have the same bite it used to have,” he added.
I think Funding for Lending can help. I was very keen that it be introduced. There are no silver bullets. People rightly point out that there may be weak demand for credit. Of course that’s an element. But the Bank should do what we can to alleviate problems in credit supply, consistent with staying within our remit as a central bank.
Asked if the Bank of England will add to its QE scheme in the next few months, he said: “Technically we could do more. It’s just a question of what we think the risk to inflation would be.
“I don’t think we should just have one option in these circumstances, which is why we are pleased to have launched the Funding for Lending Scheme,” he said.
Ben Bernanke describes US economy as ‘far from satisfactory’ and shares concern over unemployment and growth
US central bank chief Ben Bernanke sparked a surge in share values on Friday after he signalled his willingness to embark on a third phase of money creation to boost the US economy.
The Dow Jones industrial average closed the day with a gain of 90 points after the chairman of the Federal Reserve gave a robust defence of past central bank interventions, which, traders said, prepared the ground for a third round of quantitative easing should the economic picture worsen. France’s CAC and the German DAX closed up 1%.
In his much anticipated a speech in Jackson Hole, Wyoming, Bernanke described the current economic situation as “far from satisfactory”. He said that high rates of unemployment were a “grave concern, not only because of the enormous suffering and waste of human talent it entails, but also because persistently high levels of unemployment will wreak structural damage on our economy that could last for years”.
His speech to the annual central bank symposium came ahead of September’s meeting of the Federal Reserve’s open markets committee (FOMC), which sets US economic policy. Recently released minutes from its last meeting show the committee has become increasingly concerned about the US recovery and is weighing further action.
However, since the last FOMC meeting, more positive economic news has emerged on jobs and housing. Next week the closely watched non-farm payroll survey of monthly employment trends will be released. After a sharp rise over the winter, job growth slowed in the spring, but appears to be picking up again.
He urged European leaders to make faster progress in tackling the debt crisis affecting Greece and other indebted eurozone countries. His concerns that Europe may drag the US back into recession were highlighted by figures showing that unemployment across the zone remained at an all-time high in July.
The European Union’s statistical agency, Eurostat, said 88,000 more people were without a job in July, pushing the total out of work in the eurozone to 18m, the highest level since monetary union in 1999.
The 11.3% unemployment rate, up 1.2 points from a year earlier, failed to come down after joblessness increased in Spain and bailed-out Greece. In Spain youth unemployment stood at 52.9%, in Greece at 53.8%.
Any monetary action by the Fed is likely to trigger a furious response from elements within the Republican party who have criticised his past actions and warned against new measures.
Mitt Romney, the Republican presidential candidate, has made it clear he will replace the Fed chief, who he accuses of putting taxpayers’ cash at risk, if he is elected in November.
The House financial services committee chairman, Spencer Bachus, told Bernanke last month at a congressional hearing: “The truth is the Federal Reserve cannot rescue Americans from the consequences of failed economic and regulatory policies passed by Congress and signed by the president.”
The initial US quantitative easing programme from November 2008 to May 2010 saw the Fed buy $1.75tn in debt held by mortgage providers Fannie Mae and Freddie Mac, a range of mortgage-backed securities and government bonds, mostly from the country’s 3,000 banks.
A second round, dubbed QE2, involved an additional $600bn. “Operation Twist” began in September 2011 with a pledge to swap $400bn in short-term loans for longer term bonds, with an extension in June adding a further $267bn.
Bernanke offered a strong defence of his actions at Jackson Hole. “A balanced reading of the evidence supports the conclusion that central bank securities purchases have provided meaningful support to the economic recovery while mitigating deflationary risks,” he said.
In a swipe at Republican critics who accuse him of jeopardising hundreds of billions of taxpayer funds following the expansion of Federal Reserve loans, he said loans by the Fed since the bank rescues of 2008 had earned money for the exchequer.
David Zervos, head of global fixed income strategy at US investment bank Jefferies, said it was unlikely the Fed would back a further round of central bank lending before the presidential election in November.
“The idea that the Fed would come out with unconventional monetary policy, such as credit easing of some kind, seems to be a little bit of a stretch,” he said.
“This was a backstop speech that gets Bernanke through. If the data turns or Europe turns, then the Fed is back in.”
Gus Faucher, senior economist at PNC Financial Services, said: “It sure sounds to me like he is getting ready to act.”
He said the FOMC would now be waiting for the non-farm payroll figures. In July, the US added 163,000 new jobs, more than many economists had expected. Faucher is predicting that 130,000 new jobs were added in August, while other analysts are expecting about 100,000.
“If it comes in below 100,000, I think the Fed will act,” he said. “That would be four out of five months below 100,000. That’s not good enough.”
MPC member says quantitative easing ‘more powerful way of aiding economy … but we’re keeping that under review’
A senior Bank of England policymaker said quantitative easing was a better way of kickstarting the economy than further interest rate cuts.
On a visit to Northern Ireland, monetary policy committee (MPC) member Paul Fisher told the Belfast Telegraph: “If we thought [rate cuts] would add more stimulus we would do it but asset purchase through quantitative easing is a more powerful way of aiding the economy … but we’re keeping that under review.”
His comments came as minutes of the MPC’s last meeting a fortnight ago showed that it had voted unanimously to keep its interest rate at 0.5% and its quantitative easing (QE) programme unchanged at £375m. Despite the unanimous vote on QE, the minutes point to a continued split on the committee.
While some members thought there was a “good case” for more stimulus at that meeting, for the majority on the nine-strong committee the decision was “relatively straightforward”. They wanted to take stock of the impact of the funding for lending scheme over coming months. The minutes noted that several banks have already lowered rates on some mortgage and small-business loans in response, but added that it would take a while before it would be possible to assess the impact the scheme was having on lending.
Spencer Dale and Ben Broadbent, who voted against the extension of QE in July, saw costs to reversing the MPC’s decision in August, suggesting that it was these costs rather than a conversion to a more dovish view that prompted them to support the decision of the majority this time around, noted Chris Crowe, economist at Barclays Capital.
He said the committee has returned to wait-and-see mode while the current round of asset purchases is completed, although he expects the MPC to announce further economic stimulus in November unless the economy improves.