Bank ready to pump more cash into economy, says MPC member

The central bank created £200bn in 2009 in an effort to offset the effects of recession and is now halfway through another £75bn of asset purchases.

Minutes from the last committee meeting yesterday showed that members were split on the need to increase its programme of so-called quantitative easing.

David Miles said: “If we need to, we can, for sure. We have the ammunition and a willingness to use that ammunition. We haven’t run out of options or tools in terms of monetary policy.”

He said that the first round of quantitative easing added between 1.5 and 2 per cent to gross domestic product in 2009, a measure of total economic activity.

Explaining the programme’s impact, he said: “We are buying assets off pension funds, life insurance companies, people who invest in UK government bonds.

“We buy government bonds off them and give them in exchange cash. Chances are they are going to use some of that cash in an alternative investment and that money may feed through to UK equity market.

“More likely it will feed through to the UK corporate bond market, which is going to get money back into the corporate sector.

“Some of it will flow back into the banking system and at a time when banks are facing some stresses in funding that can do some good as well.”

Mr Miles admitted that “one way or another, much of that money does flow back into the banking system”.

He added: “That doesn’t mean that it just sits there and does nothing and hasn’t had any use.

“Some of that money will come back into the banks and allow them to do more lending than they otherwise would have done. Some of that money flows back through a slightly indirect route.”

Mr Miles said: “Let’s suppose that we buy some gilts from a pension fund. UK pension fund then uses the money to buy some debt directly from a UK non-financial company that uses that money to repay some debt that it had with a bank and the bank in turn uses that money to lend some money to another company that couldn’t use the bond market.”

He claimed that the purpose of the programme was “to try to influence the cost and availability of credit to companies and households and try and boost demand to offset this downturn which to some extent was a reflection of things happening outside the UK”.

Mr Miles said the UK had lost between 10 and 15 per cent output over the last four years. He described it as “a downturn of enormous magnitude” and “one of the most serious in the last 100 years”.

He added: “What’s made life difficult in trying to respond in monetary policy is that we’ve had an unfortunate combination of low output, rising unemployment but inflation that’s very substantially above the target level.

“I think we’ve been right to see through what I think will prove to be a temporary period of high inflation and set monetary policy at a very expansionary setting to try and offset some of these enormous recessionary forces that have hit the UK economy.”

He said he was surprised at how long the after-effects of the financial crisis have lasted.

“It’s the kind of thing you read about and learned about when I was starting to do economics about the Great Depression and I thought ‘thank goodness, I won’t have to deal with that kind of stuff in my life because we have worked out how to avoid that’ and lo and behold we haven’t really.”

He said that the eurozone crisis “is already having a substantial impact on the UK because the cost of funding for many companies and banks in particular has gone up”.

Mr Miles added: “I think UK banks are in a relatively strong position in Europe, both in terms of their capital and their exposure to some of the more problematic countries.

“But nonetheless they get sucked into some of the funding difficulties and that’s already happened over the last four or five months.”

He said the UK is “probably in for a period of very low growth for the next few quarters”.

Asked if he thought an increase in public spending could head off a recession, Mr Miles said: “It’s a difficult fiscal situation. It’s a large deficit. The scope the Government has to try and boost demand through big increases in spending or cuts in taxes is very constrained.

“Frankly, we should be pretty glad that we are in a situation where the UK is in a small and select group of countries whose governments are able to issue debt at the moment at what are extraordinarily low interest rates.”

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