Bank of England’s Miles Says Rapid Return to Growth Unlikely

By Brian Swint

July 2 (Bloomberg) -- Bank of England policy maker David Miles said the U.K. economy probably won’t make a “rapid” return to growth after the financial crisis.

“Whilst a return to growth does seem plausible and policy is gaining traction in the economy, the idea that we will return to rapid growth that will be sustained over several years seems pretty unlikely,” Miles told Parliament’s Treasury Committee in London today.

The U.K. economy contracted 2.4 percent in the first quarter, the most in five decades, and Miles said that the availability of credit is still “a real issue” as the banking system “remains on life support.” Banks expect losses from defaults to rise and construction activity unexpectedly contracted at a faster pace in June, other reports showed today.

An appreciation of the pound, which has risen 12 percent against the dollar this year, may also jeopardize the economy’s recovery, Miles said.

“Despite the recent strength in sterling, over the last 18 months we’ve seen a substantial depreciation,” Miles said. “Should there be dramatic changes in the exchange rate, an appreciation of sterling, that would short-circuit that very helpful adjustment mechanism which would otherwise help.”

The pound traded at $1.6362 today, compared with $1.4548 at the start of the year. That’s still down from the record $2.1162 reached in November 2007.

Purchase Program

The U.K. central bank voted unanimously in June to maintain the program to spend 125 billion pounds ($205 billion) of newly created money on government and corporate debt and to keep the benchmark interest rate at a three-century low of 0.5 percent.

It’s “difficult” to assess yet whether the policy is working to improve the flow of credit and bolster the economy, policy maker Timothy Besley said in a speech in London today, though there is some evidence that funding conditions in corporate bond markets have improved, he said.

U.K. banks expect to increase credit to households and companies in the next three months and demand for mortgages has increased, the Bank of England said in its quarterly credit conditions survey today.

Besley said there’s “no sense in which there’s a specific timing discussion” on when to end so-called quantitative easing. Both he and Miles said that at some point the Bank of England would have to start raising interest rates and selling the bonds it has purchased.

The next interest-rate decision is July 9.

To contact the reporter on this story: Brian Swint in London at bswint@bloomberg.net.