No interest rate change for months, says MPC member
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Monetary Policy Committee member David Miles says it is unlikely the Bank of England base rate will change in the next few months.
In a speech delivered to the Royal Economics Society tonight, Miles told the audience: “Judging by money market interest rates and yields on short dated government bonds the market expectation is that Bank Rate will not change for many months yet.”
Referring to the effects of the Bank of England’s asset purchases during 2009/10, Mills says: “a range of estimates…suggested that the asset purchases had about the same effect as a cut in Bank Rate of between 150 basis points and 300 basis points, increasing GDP by about 1.5% to 2%.”
Miles says he believes that there are very good reasons for thinking that purchases of government bonds in exchange for money created by the central bank will have an impact on a range of asset prices and will influence the cost and availability of credit to the private sector.
He says there are two main channels by which asset purchases ease credit conditions and stimulate demand: the first – more reliable and probably more powerful channel - operating through portfolio rebalancing and the second by potentially alleviating bank funding constraints should they exist.
Miles says that domestic inflationary pressures are lower than he thought in August; and that this, combined with financial market stress and concerns about the stability of the banking sector, lay behind the decision to make further asset purchasess last week.
He is sceptical of the arguments that the impact of further asset purchases will be less than in 2009 even though gilt yields are now lower.
Miles blames the banking sector for a deterioration in the UK’s growth over the past few months on the banking system.
He says: “In my view, the key reason is the fragility of parts of the banking sector. And it seems to me clear that an important part of the long-term strategy to stop this happening again must be to make the financial system - and banks in particular- much more robust.
“As I have argued previously, I believe that the single most effective way to do this is to is to have banks use much more equity and less debt to finance their activities so that their leverage is reduced.”
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