Reuters: US Dollar Report: UPDATE 3-Bank of England's Tucker open to more bond-buying and weaker pound

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UPDATE 3-Bank of England's Tucker open to more bond-buying and weaker pound Feb 26th 2013, 15:11 Tue Feb 26, 2013 9:01am EST * Says economy yet to feel full effect of 2012 bond-buying By William Schomberg and David Milliken LONDON Feb 26 (Reuters) - The Bank of England's deputy governor said he would agree to the central bank buying more government bonds if needed although its stimulus efforts to date should become more effective at boosting growth than they were last year. Paul Tucker was among six policymakers who voted against new purchases of government bonds (gilts) this month, pitting him against governor Mervyn King and two other officials who backed more bond buying. The split raised expectations in financial markets the Bank of England would eventually pursue more stimulus. "I remain open to doing more QE (quantitative easing), depending on the outlook for demand and inflation," Tucker said on Tuesday in an annual report to British parliamentarians. Tucker also said the impact of bonds bought in the past might give a greater boost to Britain's economy this year, as the initial effectiveness had been hit by concern about the global economy at the time. "The existing degree of monetary easing from QE is likely to gain more traction on spending than it had last autumn, given reduced tail risks from the international environment," he said. Britain's economy showed no growth last year and contracted in the fourth quarter, despite the central bank having spent a total of 375 billion pounds ($567 billion) on its bond-buying programme and with interest rates still at 0.5 percent. When pressed by lawmakers about the possibility of more bond-buying, Tucker said the Bank of England's nine-strong Monetary Policy Committee had not written it off. "Nobody on the committee thinks that QE has reached the end of the road and that it is not a useful instrument anymore. We stand prepared to do more, if we judge that necessary," he said. Government bond prices were unchanged by the comments of Tucker and other Bank of England officials in parliament. The Bank of England has signalled it will tolerate inflation remaining above its 2 percent target because it views the impact of a weaker pound and some price increases as temporary. Tucker said it was important not to give the impression the central bank was relaxing its commitment to bringing down inflation over the medium term. "We are, in today's language, (doing) flexible inflation targeting but without ever, ever taking our eye off medium-term inflation expectations." Tucker was considered the frontrunner to take over as governor later this year until the surprise appointment in November of Mark Carney, currently head of the Bank of Canada. He is seen as being tolerant of inflation remaining above target. WEAKER POUND NEEDED, INFLATION COULD ERASE GAINS Tucker added his voice to suggestions from top policymakers that the pound may need to weaken more to help British exports. "As a matter of analysis ... we believe that the real exchange rate needs to fall, compared with where it was a few years ago, to get the necessary rebalancing in the economy," he said. The pound touched a 16-month low against the euro and a 2-1/2 year low against the dollar this week, hit by Britain losing its AAA rating by Moody's and by expectations of the Bank of England printing more money. Tucker said the benefit of a weaker pound, such as boosting exports, would vanish if inflation expectations rose too high. "If we were to somehow lead the markets to think that we like 3 percent (inflation) and that is what it was going to be, then yes, you will find a fall in the exchange rate. But it will be a fall in the nominal exchange only," he said. "It won't be a fall in the real exchange rate, and it will do absolutely nothing for the recovery in ... trade." Link this Share this Digg this Email Reprints

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