The U.K. is unlikely to need another dose of central bank stimulus unless events in the euro zone threaten to plunge its economy back into a deep recession, a senior Bank of England official said Thursday.
Paul Fisher , the BOE's executive director for markets and a rate setter on its Monetary Policy Committee, told Dow Jones Newswires in an interview that the GBP325 billion of quantitative easing--the purchase of government bonds with new money--that the central bank concluded earlier this month should be sufficient to underpin a recovery, barring any economic storms from across the English Channel.
"Can we be confident we've done the right amount? Of course not. The world is so uncertain. Do I think we are broadly right? Yes," Fisher said.
The BOE revived its QE program last October in response to a darkening outlook for the U.K. economy, which was menaced by the sovereign debt crisis roiling the euro zone and threatening the continent's banks.
The program had been on hold since purchases reached GBP200 billion in February 2010 , but Fisher and his colleagues would go on to sanction a total of GBP125 billion of additional stimulus in the following months to stabilize the economy and stave off the risk of deflation.
Although official data have shown output in the U.K. shrank for two consecutive quarters to March, Fisher said the economy did avoid the deeper downturn central bank officials had feared.
"For me, the key reason for restarting QE last October was the possibility that the U.K. could topple over into a deep recession again. We seem to have hopefully headed that risk off at the pass. We've had a couple of quarters of negative growth, but we haven't really had a fall back into a deep recession," Fisher said.
"If I saw that risk re-emerging, then personally I would want to think again about restarting," he said. "If there is not that serious possibility of deflation down the road, then I think there is less impetus behind doing more asset purchases."
Fisher is regarded as a centrist on the MPC and his remarks suggest many on the nine-member committee will be unlikely to support any further stimulus unless the economy's prospects take a serious turn for the worse. Fisher stressed Thursday that even if the BOE isn't adding to its QE program, its stimulative effects persist. He said that it is the stock of assets, not the flow, that is of primary importance to the economy.
The BOE's latest forecasts for inflation and economic growth in the U.K. , published Wednesday, indicate that rate setters expect the economy to begin to pick up later in the year after its shaky start.
Yet tensions in the euro zone have flared up again following fresh worries about Greece's ability to remain in the currency area, which Fisher agreed with BOE Governor Mervyn King is probably the greatest threat to the U.K. economy.
There are "a whole range of channels" through which disorder in the euro zone could affect the U.K. , Fisher said, including through the banking system and effects on firms' and households' confidence.
"It's much more pervasive than just the net export calculation would give you, " he said.
He said that the possibility that the crisis in Greece could lead to large scale withdrawals of deposits from the banking system, and that savers in other troubled economies would take that as a signal to do the same, was "the contagion channel that's most worrying."
Still, Fisher added the BOE's forecasts are based on euro-zone policy makers " muddling through", and a comprehensive solution to the crisis could restore confidence and transform the U.K.'s economic prospects.
"There is an upside risk to this," he said.
And he expressed solidarity with his counterparts at the European Central Bank , who pumped more than $1 trillion in three-year loans in the euro zone's banking system in December and February, hoping that governments would act to resolve the crisis.
"You can imagine the frustrations they must have," he said of the ECB. "All central banks can do is provide liquidity. All liquidity can do is buy you time. It's then in the hands of politicians and the fiscal authorities to make the real choices for the economy."
He said sterling's recent advance against rival currencies could come to an end if the euro zone's fortunes improved.
The pound has pushed up to its highest levels in three-and-a-half years when measured against a basket of currencies from the U.K.'s major trading partners, sucking in support from savers and investors keen to avoid the immediate impact of the euro area's deteriorating debt crisis.
Since late February, the euro has declined by nearly 6.5% against the pound, leaving it at GBP0.80 --its lowest point since 2008. Similarly, if less dramatically, sterling late last month nudged its highest point against the dollar since August last year, peaking at $1.63 . Thursday, it is hovering at around $1.59 .
Although some parts of the economy are still benefiting from a substantial depreciation of sterling in 2007 and 2008, Fisher said any consistent appreciation of the pound in coming months would make policy makers " uncomfortable" about the economy's chances of successfully rebalancing away from debt-fueled consumption towards exports and investment.
The BOE's forecasts show rate setters now think the annual rate of inflation will slow to its 2% target by the middle of 2013--six months later than policy makers predicted in February. The annual rate was 3.5% in March.
Fisher said most central bank officials are fairly sure inflationary pressures in the domestic economy are subdued, as evidenced by weak wage growth. The factors keeping inflation high, such as commodity prices, are still emanating from overseas, he said.
But he added that the BOE couldn't tolerate high inflation indefinitely, even if it was the product of a series of external shocks.
"Eventually, if inflation continues to stick, year after year, above the target, then we will lose credibility," he said. "We are mindful of that and we don't want to take risks with credibility. People's inflation expectations have been remarkably resilient through this episode. We need to justify that by getting inflation back to target over the next couple of years."
-By Jason Douglas , Dow Jones Newswires; 44-20-7842-9272; jason.douglas@ dowjones.com
( Katie Martin in London contributed to this article.)
(END) Dow Jones Newswires
05-18-12 0130ET
Copyright (c) 2012 Dow Jones & Company, Inc.
