Fisher pro QE but warns over ‘indefinite’ stimulus

Paul Fishe: 'I don't want to get into the American position of saying it is indefinite ''and then stopping'. Picture: Contributed
Paul Fishe: 'I don't want to get into the American position of saying it is indefinite ''and then stopping'. Picture: Contributed
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BANK of England policymaker Paul Fisher has cautioned against a US-style commitment to long-term financial stimulus, although he remains in favour of a “slow amount” of additional bond purchases.

Since February, Fisher has joined outgoing Bank governor Sir Mervyn King and fellow monetary policy committee (MPC) member David Miles in voting for more quantitative easing (QE) to boost the economy.

However, he said: “I don’t think I want to get into the American position of saying it is indefinite and then stopping. I think the Americans are finding it a bit hard – as we have seen recently – to get out, because they have got this indefinite horizon.”

Global financial markets were spooked by comments this week from Federal Reserve chairman Ben Bernanke, who said the US central bank could begin scaling back its $85 billion (£56bn) monthly pace of bond purchases in the next few meetings.

While Bernanke stressed that the Fed needed to see more signs of recovery before weaning the world’s largest economy off its stimulus, the market reaction – including a sharp fall in Japan’s Nikkei – highlighted the problems of managing a smooth exit from the Fed’s bond-buying.

A majority of MPC members remain in favour of keeping the Bank’s £375bn QE programme on hold, but Fisher said: “My view is that we should be doing a slow amount over a period of time. £25bn over three months is a slow rate.

“That would be what you kick off with. And then you would stop when you thought conditions were looking a lot better.”

In a speech in Cardiff, Fisher said the Bank’s efforts had “done well to underpin the economy and to stop recessionary forces from gaining the upper hand” but he warned that loosening monetary policy posed “asymmetric” risks. He said: “If we push too much money into the system, the risk would be that it does nothing for real output, which is being driven by real adjustments – instead it could just end up in higher inflation.”

Inflation has been running above the Bank’s 2 per cent target since November 2009, but a fall in transport costs saw the rate ease to 2.4 per cent last month, from 2.8 per cent in March. Fisher acknowledged that QE had contributed to increasing prices, but added: “That seems to me a much better outcome than the alternative of a deeper recession and a greater risk of deflation.”

Investors are now awaiting the arrival of Canadian central banker Mark Carney, who takes over from King on 1 July, to assess the chances of a resumption in bond buying.

Fisher also said yesterday that he was not convinced that a cut in interest rates from their current record low of 0.5 per cent would stimulate demand, warning such a move could even have the “perverse” effect of leading people to save more.

Barclays economist Simon Hayes said: “This argument is worth highlighting because it is different from the one the MPC has used in the past to justify not cutting the bank rate further, which was that some lenders’ margins might be squeezed and so credit supply might be harmed rather than improved.

“Fisher’s stance on interest rates implies that the chances of a bank rate cut on the arrival of new governor Mark Carney are rather low.”