LONDON (Reuters) - Bank of England policymaker David Miles said on Friday he would have backed a much bigger increase in monetary stimulus this month if the government had not announced plans to take a cash surplus of over 35 billion pounds from the central bank.
The Bank agreed this month to a finance ministry request that it return the interest paid on 375 billion pounds of government bonds it has bought as part of its quantitative easing policy.
The bank’s Monetary Policy Committee was told of the decision just as its members were deciding whether to extend that programme of asset purchases.
“It certainly affected my vote,” Miles told Reuters in an interview. “I voted for 25 billion. I think I would have voted for a significantly higher number.”
All other MPC members voted to suspend further asset purchases entirely.
While Bank’s Governor Mervyn King said that the government’s move was tantamount to a small loosening of monetary policy and that the MPC had taken it into account, Miles is the first policymaker to say explicitly that it changed his decision.
Opposition politicians and some economists have criticised the government move, saying that it seemed designed to make it easier for the government to meet its debt-reduction targets and that it threatened Bank’s independence.
Miles said he did not believe the BoE’s independence was at risk, however. He was confident future MPC members would be able to resist any government pressure not to raise interest rates above the near 3 percent level at which the complex deal would require the government to pay money back to the Bank.
Chancellor George Osborne is under pressure ahead of his half-yearly budget statement due on December 5, as persistently weak economic growth is endangering his central goal of cutting the budget deficit and putting debt as a share of national income on a downward path by 2015.
The opposition Labour Party has argued that the pace of cuts is so fast as to be self-defeating, but Miles said the big deficit the government inherited limited its alternatives.
“We are still running a very large deficit, therefore ... the scope to make fiscal policy substantially more expansionary is clearly very limited,” Miles said.
He also said tight fiscal policy was not the main reason for poor growth.
“The main factors behind weak growth in the UK over the last couple of years are not the fiscal stance, (but) much more to do with ... very weak growth in our main export market, and probably most important of all a major squeeze on households’ real disposable income,” he said.
A sharp drop in inflation from a peak of 5.2 percent in September 2011 to 2.7 percent last month gave Miles optimism that the squeeze on households was easing and that the economy would slowly return to steady growth over the next few years.
His outlook for growth and inflation is close to the BoE’s quarterly forecasts, which see growth rising to an annual rate of around 2 percent by early 2014 after being effectively flat for the past year.
“We could find ourselves in a situation of self-reinforcing growth where optimism picks up and boosts productivity,” he said. “At the same time there are pretty substantial risks on the other side. The euro zone has its output declining. That may be persistent and that would be a major headwind for growth.”
Miles also agreed with Bank’s forecasts that show inflation holding roughly around its current level before it falls below 2 percent, but only in the second half of 2014.
These forecasts did take account of upward pressure on inflation from increases in student tuition fees and utility bills, Miles said, adding that the MPC should not ignore these prices rises, even if it cannot easily affect them directly.
He also defended his call to increase monetary stimulus at a time when other MPC members are concerned about inflation risks from weak productivity.
“My judgement has been that the amount of slack in the economy is significant and that the very poor productivity numbers we have seen in the UK are a reflection of the very weak growth itself,” Miles said.
He insisted that asset purchases remain effective at a time when some MPC members are concerned that weak business confidence means it is losing its power.
“I am not actively thinking about ‘what we could turn to, given we have run out of effective tools’,” he added. “I know there is a degree of scepticism about how effective quantitative easing is, but I am not one of the sceptics there. It remains a pretty powerful tool,” he said.
The BoE’s Funding for Lending programme, aimed at boosting bank lending to households and businesses, should also bring dividends in the next six to 12 months, Miles added.
King has warned that the Bank may be nearing the limits of what it can do with monetary policy to ease the long-term pain of Britain paying down debt and shifting to being a more export-oriented economy. But Miles offered a more hopeful note.
“There are always pretty significant limits to what monetary policy can achieve. Whether those limits are far narrower and tighter now than in what you might call more ordinary times is not self-evident,” he said.
Editing by Hugh Lawson