Gilt purchases could bring down corporate debt costs - Miles
LONDON (Reuters) - Bank of England gilt-buying under its asset purchase programme could have "quite a substantial effect" on bringing down the cost of corporate debt, Bank of England policymaker David Miles said in an interview with CNBC broadcast on Tuesday.
"It's certainly true that gilt yields themselves have fallen very substantially and are at unusually low levels, but the yields on corporate bonds have actually moved up quite significantly over the last couple of months," Miles said.
"One of the knock-on effects of the Bank of England buying gilts is that it increases the demand for those corporate bonds which are substitutes for gilts," Miles said.
"We could have quite a substantial effect on bringing down the cost of that corporate debt through buying gilts," he said.
The Bank of England launched a second round of quantitative easing last Thursday to defend Britain's faltering economy against the euro zone debt crisis, pledging to buy 75 billion pounds of assets.
Miles said he would have "some sympathy" for buying corporate bonds directly if it was the only way the bank could have an effect.
"But actually I think there are strong reasons for thinking that buying gilts will have a very desirable knock-on impact."
One of the difficulties with the Bank of England buying corporate debt was that the Monetary Policy Committee would then get drawn into having to make decisions about the creditworthiness of particular companies, he said.
"The Monetary Policy Committee really isn't a natural place to make those kind of credit decisions and if we can have a beneficial impact through buying gilts, it has the great advantage that you are buying in a very deep, liquid market without having to make those credit decisions between different companies," he said.
Explaining why the bank embarked on a new round of asset purchases, Miles said: "The assessment was made that the news that had come through over the last few weeks meant that the outlook for demand in the UK just looked that much weaker, that commodity prices had fallen, and therefore the inflation pressures in the UK, more likely than not, a year, 18 months down the road, just looked weaker than they had in August when we came out with our previous Inflation Report."
"It was because the outlook for inflation was actually weaker and demand was weaker that the decision was made to make monetary policy even more expansionary," he said.
Miles said he was a "bit sceptical" about the argument that the Bank of England was aiming to weaken sterling through its asset purchase programme.
"The bank embarked upon major asset purchases back in the spring of 2009. There had been a very big depreciation of sterling in 2007 and 2008, but all that depreciation of sterling actually pre-dated the bank embarking on asset purchases," he said.
During 2009 and the first part of 2010 when the bank was buying assets on a very major scale, the value of sterling fluctuated from month to month "but actually didn't move very much at all," he said.
"So I don't think one can rely really on one of the main mechanisms whereby asset purchases work as driving down the value of sterling," he said.
"I think there are other mechanisms that are more reliable, direct and quite powerful -- through changing the prices of a range of assets, including importantly sterling corporate bonds, making it easier for banks to at least maintain their lending rather than cutting it back, by easing the conditions in the bank funding markets, and by having a general positive knock-on impact on a range of asset prices that might include equities as well as sterling corporate bonds," he said.
(Reporting by Adrian Croft; Editing by Susan Fenton)
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