Reuters: US Dollar Report: UPDATE 1-BoE's Weale: new schemes made him hold back on June QE

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UPDATE 1-BoE's Weale: new schemes made him hold back on June QE Jun 21st 2012, 20:35 Thu Jun 21, 2012 4:35pm EDT * BoE has scope to do more QE without inflation worry * New credit schemes will affect scale of future QE * Sterling may need to weaken to close UK trade gap By David Milliken and Sven Egenter GUILDFORD, England, June 21 (Reuters) - The Bank of England has scope for more monetary stimulus and could have injected extra cash into the economy earlier this month without creating inflation risks, policymaker Martin Weale said on Thursday. But Weale, who voted with the 5-4 majority against extending the BoE's purchases of government bonds beyond the current total of 325 billion pounds ($509 billion), said he had wanted to see details of new schemes to ease credit constraints first. "The Monetary Policy Committee was notified at its June meeting about the discussions under way between the Treasury and the Bank about how best to ease banks' funding costs and how to enhance their ability to lend," Weale said in a speech at the University of Surrey in Guildford, southern England. "While I shared the view that further monetary stimulus could be applied to the economy without putting the inflation target at risk, I wanted to wait for the outcome of these discussions before I felt able to come to a view on the appropriate stimulus," he said at the conference held by law firm Hart Brown. Britain has fallen into its second recession in four years, and is in danger of a longer slump as the crisis in the euro zone, its largest trading partner, is hurting exports and business confidence. In a rare comment on Britain's currency by the central bank, Weale said sterling may need to weaken further to close the country's trade gap. "The trade deficit will need to close further and sometimes I think the exchange rate might need to be more competitive than it is at the moment in order to help that," he said. Sterling fell by around 25 percent on a trade-weighted basis at the start of the financial crisis, but this had failed to give as much of a boost to trade as might have been expected, Weale said. His comments will boost expectations that the central bank will launch another round of quantitative easing asset purchases in July. Ben Broadbent, who also voted against more QE in June, said in a Reuters interview on Wednesday that the case for further stimulus had grown. Weale said that he thought the new measures would, pound for pound, be more effective than quantitative easing, and that QE was probably less effective than the BoE's published estimates. "I am not sure that it has necessarily been as powerful as some of the estimates from the Bank have suggested," he said. However, he stressed that that did not mean he was ruling out further QE purchases of British government bonds with newly created money. In any case, the asset purchases were not designed to bring effective interest rates set by banks closer to the central bank's record low interest rate of 0.5 percent, but rather to make it easier for firms to raise capital in general, he said. LOWER RISK OF ENTRENCHED INFLATION Weale said the fall in raw materials prices improved the overall inflation outlook, lowering the risk of above-target inflation becoming entrenched. British consumer price inflation fell unexpectedly to 2.8 percent in May from 3.0 percent the month before. "This in turn means that there is appreciably more room for further monetary stimulus," he said. At the same time, the near-term prospects for the economy had worsened. "Data ... suggest that the international environment has become considerably worse," he said. Although British household consumption was not particulary depressed relative to income, business investment was "very weak", he said. "It seems highly likely, although of course we cannot be certain, that high interest rates and, in all probability, credit rationing, are factors depressing the economy," he said. The financial crisis had highlighted the need for a wide-range of tools to keep monetary policy effective, Weale said. The central bank's new liquidity tool, the so-called Extended Collateral Term Repo (ECTR), and the new funding-for-lending scheme were important steps to provide extra monetary support for the financial system and the economy. "The Chancellor (finance minister) recognised this when he spoke at Mansion House about 'monetary policy in all its forms'," he said. "I suspect that, pound for pound, the new interventions will do more to support the economy than would deploying the same sums on further asset purchases," he said. Link this Share this Digg this Email Reprints

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