More Asset-Buying Depends on Economy: Bank of England

More asset-buying by the Bank of England will depend on how the economy evolves between now and May, David Miles, the Monetary Policy Committee member who joined ultra-dove Adam Posen in voting for an even larger boost in quantitative easing, told CNBC.

London Financial District
Photo: Vulture Labs | Getty Images
London Financial District

Minutes from the Bank of England's meeting released on Wednesday showed Miles and Posen voted for a 75 billion pound ($117 billion) boost to the bank's program of buying government bonds, also known as gilts, more than the 50 billion pounds the Bank announced it would inject.

Their position brought back into the limelight the debate on whether the central bank will resort to more quantitative easing, with some economists expecting it to do so in May.

"We'll see where we are in May," Miles told CNBC in an interview, adding that in his opinion, barring some unforeseen circumstances such as a spike in the price of oil, the pace of price rises is likely to keep coming down.

"I think it is likely that wage settlements remain pretty subdued and that's one of the reasons why it seems to me pretty likely that inflation will continue on the downward trajectory we've seen over the last few months," he said. "That looks like it's playing out in a way that we thought would happen 6-12 months ago."

He said he voted for more quantitative easing this month because the UK economy was still in a bad condition and monetary policy "very expansionary" and boost demand as much as possible.

"If you stand back and see where the UK economy is, it's still in a precarious situation," Miles said. "There hasn't really been much of a recovery from what was one of the deepest recessions in the history of this country."

As well as the upside risk of an oil price, there are downside risks to inflation, according to Miles.

"I think there's plenty of risk on the other side, probably the biggest one is that things play out badly in the euro zone, that some of those risks crystallize, that that hits demand across Europe, the UK's biggest export market," he said.

More Gilts Available

Some economists argue that the Bank of England's strategy of buying gilts was not the best as banks are just hoarding the cash instead of passing it on to the wider economy, but Miles

"My view is that the quantitative easing strategy of buying overwhelmingly gilts actually remains quite a powerful tool," he said.

The outstanding stock of gilts that the central bank could buy is actually larger than when the bank started its asset-buying program back in March 2009, Miles disagreed.

"The creation of new gilts by the government has actually met, more than matched, the pace of purchases by the BOE since we started buying in the early part of 2009. We're certainly not in a situation where any time in the near future we simply run out of bonds that we could buy."

Economists have said that credit conditions in the UK remain tight and that consumption is suffering because of this.

"I think it would be foolish to expect the availability and cost of credit to households and to companies to go back to the relatively easy conditions we were in in the years leading up to the crisis of 2006-2007, that seems to me pretty unlikely," Miles said.

But "fairly soon, probably this year, for most households the squeeze on their disposable income is going to come to an end" said Miles, who pointed out that over the past few years wage increases have been consistently lower than the rate of inflation.

"I suspect that very unusual situation which has lasted for a few years will end fairly soon and that will really change the dynamics of consumer spending in the UK," he said, adding that any future decisions on quantitative easing will depend on the economy, of which the consumer is a big part.