Dale Says BOE Purchases Show ‘Encouraging’ Signs

By Svenja O’Donnell

June 23 (Bloomberg) -- Bank of England Chief Economist Spencer Dale said the central bank’s program to buy assets with newly printed money is showing “encouraging” signs of helping the economy escape the recession.

The bank’s plan is “on track” for 125 billion pounds ($204 billion) in purchases by the end of July, Dale said at the Society of Business Economists annual conference in London.

“The growth rate of underlying broad money has picked up in recent months,” and “it is likely that yields are lower than they would have been” for gilts, Dale said today. “And in the corporate bond market, spreads have narrowed sharply.”

The Bank of England cut the benchmark interest rate to a record low and started printing money to buy bonds to fight “a deep recession,” Dale said. Responding to criticism that some purchases of gilts have been from foreign investors who are more likely to buy assets in currencies other than the pound, he said that wouldn’t curb the program’s effectiveness.

“It does not mean the asset purchases will not have any economic benefit,” he said. “Rather, more of the effect will come through a lower exchange rate than through a change in the relative price of domestic assets. As with interest-rate changes, the exchange rate is a key channel through which the monetary easing may be transmitted.”

Dale also noted criticism that the bank has prioritized buying gilts over corporate debt. He said “appropriately targeted” purchases could still improve the flow of credit.

Economic Significance

“It is important not to judge the economic significance of these purchases by their scale,” he said. “Even relatively small purchases of debt, if appropriately targeted, can improve liquidity and lower the cost of finance to businesses.”

The quantity of private sector assets the bank buys may also decline, Dale said.

“Over a period of time, as market functioning improves, the quantity of private-sector assets held by the asset purchase facility may well decline as assets mature and are rolled over into the private market,” he said. “This should be seen as a sign of success, not of dwindling support.”

Dale said it was still “early days” to judge whether the program had stimulated nominal spending.

He said that he has “little idea” how long the Bank of England will need to keep its benchmark interest rate at a record low of 0.5 percent, and that to make a time commitment on the rate “runs the risk of being overtaken by events.”

Dale reiterated comments made last week at a conference in Oslo that he supports the central bank’s use of an inflation target, which needs to be strengthened with additional tools to help preserve financial stability.

“The single most important lesson from the financial crisis is the need to expand the range of instruments available to policy makers,” Dale said.

To contact the reporter on this story: Svenja O’Donnell in London at sodonnell@bloomberg.net.