New Bank of England policymaker David Miles warned that any signs of a rapid economic recovery were likely to prove a false dawn, and joined BoE colleague Tim Besley on Thursday in ruling out tighter monetary policy in the short term.
Miles, in his first appearance before legislators since his appointment to the BoE's Monetary Policy Committee last month, said economic growth was likely to be anaemic and described the banking system as still being "on life support".
Besley, addressing a financial regulation conference at the London School of Economics, said it was still too early to tell if the BoE's 125 billion pound ($205 billion) quantitative easing programme was working, let alone set detailed conditions for reversing it.
Both policymakers stressed the importance of bank lending returning to normal — and received only limited encouragement from a BoE survey released earlier in the day, which showed banks more willing to lend but pessimistic about demand. [ID:nL2653322]
"The banking sector is on life support and the ability of banks to lend is curtailed," Miles told the treasury committee of Britain's lower house of parliament.
"So the prospect of a rapid return to growth doesn't seem a highly probable outcome. But there are reasons for thinking the period of the most rapid declines in output are behind us," he continued.
Lawmakers asked him about the likelihood of a sharp 'V'-shaped recovery, on which government plans to bring down Britain's record borrowing are based, and Miles warned against drawing too many conclusions from initial signs that the downturn may be easing.
"It may be the case that we get what looks like a very sharp rebound over the next few quarters. One might interpret that as a 'V'-shape, but that doesn't really tell you an awful lot about what the likely path of GDP growth will be."
Sustained growth above a trend rate of 2.5 percent was pretty unlikely over the years to come, Miles added.
QE UNCERTAINTY
Similarly, Besley — whose term on the MPC ends in August — said it was too soon to see the effects of quantitative easing, which started in March and has given a major boost to gilts prices.
"We will not know for sure whether QE has been directly effective in supporting nominal demand growth for some time and a definitive assessment right now would certainly be premature," he said.
This also meant it was too early to state under what conditions the BoE would withdraw quantitative easing — which in any event was likely to be gradual, he said.
"There is no sense in which there is a specific timing discussion," he said, when asked about QE and how to get out of the policy, saying that the MPC looked at the data in the same way that it did about interest rate decisions.
"In a way I think it's important not to think of this as a discrete event in a sense that suddenly someone will say: 'We're in the exit strategy, folks!'" I think it will just be that there will be a series of policy responses that happen at the time, and they will be whatever is considered appropriate."
Miles made a broadly similar point, saying that the balance between raising interest rates and selling back gilts would depend on which instrument was most effective at controlling inflationary pressures.
On regulatory issues, Miles — formerly chief UK economist at Morgan Stanley — said the BoE needed to play a central role in future bank supervision, though he was circumspect about the precise institutional structure.
He said there needed to be stronger tools to stop the financial system overheating, for example by having variable capital requirements.
"I believe we have dramatically overestimated the cost of having financial firms hold more capital and underestimated the damage of their not having enough. We assumed liquidity would not be a problem for solvent banks. That was a mistake," he said.
