Bank of England’s Besley-too soon to know when to unwind QE

July 2, 2009

Bank of England policymaker Tim Besley     LONDON, July 2 (Reuters) – It is too early for the Bank of England to judge when it will need to start withdrawing the massive stimulus it has delivered to the economy, policymaker Timothy Besley said on Thursday.
   In a speech to a financial regulation conference, Besley also said that it was too early to judge whether the Bank’s 125 billion pound quantitative easing programme was helping to boost GDP and avoid deflation.
   “Just as with monetary policy conducted by adjusting Bank Rate, there is little point now in trying to speculate about the quantitative nature of the trigger events in the data that would lead to policy tightening,” Besley said.
   “It will be the forward-looking implications of these data that are essential to any such decision,” he said, stressing the BoE’s commitment to its 2 percent inflation target.
   He said worries that QE and record low interest rates would drive inflation above the target were undermined by the fact that inflation expectations remained anchored close to 2 percent and that financial markets were still in disarray.
   “These arguments, in my view, undermine the knee-jerk reaction to QE and the response that it will inevitably lead to a period of above-target inflation in the medium term.”
   Besley said that BoE’s quantitative easing strategy had been designed to target medium-dated gilts in order to reduce the risk of banks’ hoarding liquidity, which would have been greater if it had focused on shorter maturities.
   But he said it was too early to know if the policy was having the desired macroeconomic effect. “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.”
   In the longer term, Besley said that a greater understanding would be needed of the role of financial market frictions on the way monetary policy works through the economy.

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