Miles: QE2 could relieve banks’ funding problems

THE CHANCE that inflation will fall below the two per cent target in the medium term is rising, monetary policy committee (MPC) member David Miles told the Royal Economics Society last night.

Since the Bank of England’s inflation report was published in August, “news on the economy has been overwhelmingly negative”, Miles said.

He fears that weak growth, combined with falling commodities prices, will lead to a dangerously large fall in inflation.

Miles believes the new round of quantitative easing (QE) will boost the economy despite low gilt yields. Pointing to higher bank funding costs, he said QE2 could generate more deposits.

He also defended the policy of buying gilts rather than corporate bonds, saying “the MPC is not well placed to make credit allocation decisions between issuers and deciding which firms get funding and which do not”.