Bean Says BOE Faces ‘Tricky Judgment’ on Policy Stimulus Exit

By Jennifer Ryan and Brian Swint

May 22 (Bloomberg) -- Bank of England Deputy Governor Charles Bean said policy makers face a “tricky judgment” on when to exit its money-printing strategy as the lending squeeze keeps Britain’s economy mired in recession.

“It is possible that the supply of credit will remain impaired for some while,” Bean said in a speech in Sheffield, England yesterday. “We are still some way from having banks that feel sufficiently secure that they can lend normally, and investors that have enough confidence in the banks to provide them with sufficient funds.”

Bean said the central bank has flexibility in how it unwinds its strategy to aid the economy by buying assets with newly created money, and will be guided by its 2 percent inflation target. The Monetary Policy Committee can also raise the benchmark interest rate from the current record low of 0.5 percent, he said.

“It is not necessary to unwind the asset purchases before raising bank rate,” he said. “The timing of the withdrawal of the monetary stimulus will be governed by the need to meet the MPC’s inflation objective, not by the government’s financing needs,” he said.

Bean noted the bank may also stagger gilt sales by swapping them for short-term central bank bills.

Policy makers voted this month to increase to 125 billion pounds ($197 billion) the bank’s asset purchase program to fight Britain’s worst recession in a generation. Standard & Poor’s yesterday cut its outlook on the U.K.’s top AAA credit rating to negative from stable for the first time ever after the slump hammered tax receipts and swelled the government’s deficit.

Purchase Effects

The asset purchases have had a “beneficial impact” in cutting spreads on commercial paper and corporate bonds, and in boosting issuance of company debt, Bean said. He noted that the strategy may be helping to push down the cost of borrowing between banks, through it will “take some time” before policy makers can assess the full effects on the economy.

“Business surveys around the world do suggest that the rate of contraction in activity has been moderating over that past few months and that business confidence has started to improve,” Bean said. “So the bottom in economic activity may not be far off.”

The bank’s actions and the drop in the pound may also help the economy, Bean said.

“Our latest assessment is that the combined stimulus from policy easing and the lower value of sterling should be sufficient to lead to growth resuming as we move towards the end of the year,” he said.

Still, the squeeze on credit across the economy remains “very much at the forefront of our concerns,” Bean said.

To contact the reporters on this story: Jennifer Ryan in London at Jryan13@bloomberg.net; Brian Swint in London at bswint@bloomberg.net.