The Bank of England may have to consider alternatives to quantitative easing that are closer to fiscal policy if the economy slows sharply, the newest member of the Monetary Policy Committee told MPs yesterday.
Martin Weale, who joined the Bank's rate-setting committee from the National Institute for Economic and Social Research think-tank, broadly backed existing bank policy in his first hearing before MPs on the Treasury Select Committee.
"If growth is substantially weaker than I expect... then it would be entirely appropriate for monetary policy to look at ways in which it could stimulate the economy further," he said. "One obvious one is quantitative easing. There may be a wider range of policies which are more on the boundary between monetary and fiscal policy, but other things that the Monetary Policy Committee could play a role in facilitating."
Rather than buying more gilts with newly created money, economists have suggested the Bank could consider buying more corporate bonds and commercial paper, or lend directly to banks or even to firms. Quantitative easing had been less successful in boosting lending to small businesses than might have been hoped, due to the failure of an increased money supply in the hands of banks to translate into more available credit, Mr Weale said. It was inevitable, he added however, that banks would refuse lending to some firms.
Mr Weale maintained that monetary rather than fiscal policy was generally a better way to counter economic dips. "If things were to slow sharply then I think monetary policy should be the first line of defence."
He also made it clear that growth would need to fall significantly below forecasts before the MPVC eased policy further. "The profile of the recovery from the trough of the recession is similar to previous recessions, and that may be a slower recovery path than some people had hoped for."Reuse content