Economists in dispute over BoE strategy

ECONOMISTS proved divided over the success of the Bank of England’s quantitative easing (QE) policy at a roundtable hosted by the Bank of England and the Centre for Economic Policy Research (CEPR).

A summary of the discussion, which took place on 15 December, was released yesterday on the condition that participants were kept anonymous. It showed that some participants questioned the efficacy of the Bank’s asset purchases.

The summary said: “Some believed that the Bank’s asset purchase programme would have only a limited impact on an economy with few willing lenders and weak private sector demand for credit. As a result, those participants advocated alternative policies, aimed at providing credit more directly to the corporate sector.”

However, others pointed to the fall in corporate bond yields and the rise in stock prices since last March as evidence that the MPC’s asset purchases were having an impact on the UK economy.

Nonetheless, some remained concerned that the policy had served to reinflate asset prices and spending, and hence hinder the necessary adjustment in private sector balance sheets.

The government’s fiscal plans outlined in the pre-Budget Report (PBR) were also discussed at the roundtable. Economists noted that the PBR “contained little news about the timing, composition and extent of any further consolidation in the public finances”.

The PBR projection of a sharp rise in public sector debt relative to nominal GDP would leave little headroom for any further fiscal expansion.

Economists warned this does not allow much leeway should further stimulus be needed.

Meanwhile, chancellor Alistair Darling yesterday hosted the the first meeting of the Financial Stability Council (FSC), a more formal version of the Tripartite meetings that began in 1997 when the government took banking supervision away from the Bank of England. The meeting was attended by Bank governor Mervyn King and Financial Services Authority chair Lord Adair Turner.