–BOE King Warns It Could Seem “Easy Option”, Hurt Credibility
–BOE’s Tucker Says His Threshold For QE2 Would Be ‘High’
–MPC Miles Says Key Risks Must Manifest Themselves Before He Backs QE2

LONDON (MNI), June 28 – One important message came through loud and
clear from this morning’s Treasury Select Committee hearing with
Monetary Policy Committee members of the Bank of England – further
quantitative easing is far from being likely, let alone a foregone
conclusion.

BOE Deputy Governor Paul Tucker made clear that for him, at least,
the hurdle to further QE would be a high one. After stressing to the
committee that he regarded the present high rate of headline inflation
as “distinctly uncomfortable”, he continued:

“I am concerned that you, and the people listening, could gain the
impression that this is a committee which is uniformly drifting in the
direction of thinking more stimulus may be needed.”

“Now more stimulus may be needed. Bad things can happen and if bad
things happen that don’t threaten an upward drift in inflation then
maybe we will have to provide further stimulus,” he added

“But the threshold, for me, for that would be high,” Tucker said.

The comments dispel any lingering mystery which may have shrouded
the views of one of the more enigmatic members of the committee. While
clearly not yet ready to join Chief Economist Spencer Dale nor Martin
Weale in backing a rate hike, Tucker seems to be more concerned about
high inflation and the threat that poses to the BOE’s credibility than
other members of the unchanged rates camp.

Markets reacted dramatically to the release of the minutes for the
June meeting last Wednesday, which showed more than one member of the
MPC contemplating a chance that more asset purchases would be needed –
that is in addition to Adam Posen, who has been voting for a further
stg50 billion of QE since October last year.

Today’s comments from Tucker and BOE Governor Meryvn King suggest
that the BOE leadership thinks that the markets may have gone a little
too far in discounting QE2.

Executive Director Markets Paul Fisher is clearly one of those,
given his recent public comments, mooting further possible QE.

Post minutes speculation about who the QE sympathizers were also
focused on those on the MPC suspected of having more dovish opinions,
such as David Miles and even the governor himself.

But it seems King fears that further QE could be seen by the
markets and public as the BOE taking the “easy option” and so threaten
the BOE’s inflation-fighting credibility.

“I think it would, albeit in very much more difficult circumstances
than most in the past, be another example where we would be accused of
having taken the easy option and hence made more difficult the ability
to get low inflation in the medium term,” the told the TSC when asked
why they didn’t do more QE to help the embattled economy.

The overall impression given by key members of the unchanged camp
is that the economy is, as Tucker put it, presently being ‘buffeted’ by
all kinds of different forces and pressures to which the MPC had no
easy, effective policy response.

Tucker said that he had been ready to hike rates as soon as the
recovery reached “escape velocity” but that hadn’t happened – now there
was another potential threat to inflation, which would not be treatable
by rate rises:

“We now face another risk though. The longer the weakness persists,
the more likely it is that the supply capacity of the economy will get
eroded – which in plainer terms means that long term unemployment
increases … investment remains weak and capital gets scrapped.”

“We could find ourselves in circumstances where the upward
pressures on inflation don’t come from strong growth but come from an
erosion of supply and it is for that reason … I do think that it is a
peculiarly difficult moment to make policy.”

Miles told the TSC that he would be ready to support further QE –
but only if certain serious downside hazards to growth materialised.

One major such risk was, of course, the risk that the euro zone
crisis takes a further downward spiral to the point where it might have
a negative impact on already weak demand in the UK.

“If that were to happen, or indeed some of the other risks to
demand output in the UK were to materialise, that would make it much
more likely that I would vote for asset purchases because we would want
to offset that … If we didn’t do that the path of likely future
inflation, I think, would move down, because unemployment would be
greater … and I think it would be appropriate to respond to that by
more expansion in monetary policy,” Miles said.

For Miles more QE is not the “most likely outcome” but “it’s
certainly a possibility.”

QE2 looks far from assured. This morning’s TSC hearing revealed one
member potentially leaning towards joining the two existing MPC hawks in
backing a hike, a governor worried that it could be seen as the BOE
taking another “easy option” and yet another member (David Miles)
needing to see a lot more evidence that it might be needed – even if it
remains a clear ‘possibility’.

The committee has never looked more fragmented than these comments
suggest it could be in coming months.

–London newsroom: 4420 7862 7492; email:
dthomas@marketnews.com/ukeditorial@marketnews.com

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