EGHAM, England (Reuters) - Central banks sometimes may have no choice but to shock the markets, Bank of England chief economist Spencer Dale said on Friday, a day after the Bank of Japan unexpectedly launched a major new wave of bond purchases.
New BOJ governor Haruhiko Kuroda committed the bank on Thursday to open-ended asset buying and a dose of shock therapy which sent the yen reeling and Japanese government bond yields to a record low.
Dale told an academic conference that it was still generally best to try to ensure that markets understood how a central bank behaved, rather than to regularly surprise them.
But in response to a question on the BOJ, he said that sometimes shocks were unavoidable if markets misunderstood a central bank, or a central bank needed to shift policy rapidly.
“If people’s perception of your reaction function is incorrect, you may want to find ways of somehow demonstrating that,” he said. “But if you’re comfortable that their perception of your reaction function is fine, then I don’t think you want to.”
The Bank will have a new governor of its own in three months’ time. It will have to consider how much to prepare markets for any new policies once Mark Carney, who currently heads the Bank of Canada, succeeds the incumbent Mervyn King.
Chancellor George Osborne altered the BoE’s remit last month to give it clearer leeway to ignore temporarily above-target inflation. He has also asked Carney to look at the case for long-term commitments on loose policy, something pursued by Canada and the United States.
Dale did not say publicly whether he supported the BOJ’s shock move, which has met with a cool response from some euro zone policymakers who are concerned about a weak yen hurting euro zone exports.
But in the past the Bank has been relaxed about BOJ policies aimed at reflating Japan’s stagnant economy, even if they weaken the yen as a side effect.
Many economists expect the Bank to restart its programme of government bond purchases with newly created money, which bought 375 billion pounds of government bonds between March 2009 and October 2012.
Dale voted against the start of the central bank’s most recent bond purchases in July 2012, but made clear on Friday that he did not think the scale of purchases to date made future bond-buying inherently less effective.
“I can’t see any economic reason for why you would expect QE to have diminishing returns. Far more importantly you would expect ... QE to be state-contingent. In some states of the world we would expect the impact to be bigger than in others,” he said.
Dale was discussing academic papers presented at the Royal Economic Society’s annual conference at Royal Holloway College in Egham, just southwest of London.
One paper had argued that quantitative easing was only effective in conditions of financial market illiquidity, and that now other policies such as charging banks for deposits might be more effective at spurring economic growth.
Dale did not address these points directly, although he said he was concerned that credit markets were still not working well for small firms, and that this was one reason why the central bank launched its Funding for Lending Scheme.
Some observers have criticised the FLS for getting off to a slow start since its launch last August, but Dale said it was now starting to feed through into the real economy.
“We expect to see lending picking up this year both on the household side and the corporate side,” he said.
Reporting by David Milliken