LONDON (Reuters) - The Bank of England's two deputy governors, Charles Bean and Paul Tucker, and two external members of its Monetary Policy Committee spoke to legislators on Tuesday to explain the bank's quarterly economic forecasts.
Two weeks ago the central bank forecast that inflation was likely to exceed 2 percent until early 2016, and last week it revealed that three members of the MPC (KOSDAQ: 050540.KQ - news) - Governor Mervyn King, Paul Fisher and David Miles - wanted to restart the programme of bond purchases.
Following are highlights of remarks by Bean, Tucker, Miles and Ian McCafferty to parliament's Treasury Select Committee. Also included are extracts from annual reports by Bean and Tucker to the committee, which were published at the start of the hearing.
PAUL TUCKER
"The 2004 change (to extend the BoE's forecast range to three years from two) was very significant. I was particularly keen on it, to get away from any obsessive behaviour," Tucker said, when asked whether the MPC focused solely on the level of inflation in two years, or over a longer horizon.
"I am worried, as are others, that our current battery of credit policies may not be reaching as far into the SME sector as they might, and I should make clear that in saying this I'm speaking for myself."
"I think we need to be watchful of two things. The first is not all lending to small firms and medium-sized firms in the economy comes from banks, it also comes from non-banks... I think we should have a think - I'm neutral about what the outcome should be, to be clear with you - I think we should have a think about can we harness non-bank lenders in some way...?
"The second thing, and I talked about this in a speech late spring of last year, I find it regrettable that the markets for working capital finance in this country aren't as healthy as they were a generation or so ago... I do think, and I called last spring for bankers and corporate treasurers to work on this, I actually think the authorities at the Bank could play a role in that."
"The lifeblood of working capital finance, to medium-sized firms at least for around a century, was a trade finance instrument that was transferable and that was marketable and that we would buy and there is so much debate about the Bank of England not being prepared to lend to companies, and that isn't true, we are lending to companies via the FLS. I would simply like to explore whether or not some kind of working capital finance instrument could be rejuvenated."
"I do not have a plan in my pocket for how this should be done and my years of being the markets director are behind me, but I would like that to be debated."
"Quite an important question in the years ahead will be whether exports of financial services increase again. Whether we like it or not, it's a significant part of our economy. It's been a significant part of our external trade in the past. My personal expectation, for what it's worth, is that as the world heals, assuming that it does heal, that exports of financial services will pick up again, but I would add that we need our external trade to be more diversified."
"The most important choice about monetary policy in this country over the past 20 years has been to have a domestic price stability objective rather than an external anchor. That's what we did when we came out of the ERM. That's what we've been given to do and we must do that and nothing else."
"If either we or other central banks signal that we are going to tolerate a higher level of inflation permanently, if we were to somehow lead the markets to think that we like 3 percent (inflation) and that's what it was going to be, then yes, you will find a fall in the exchange rate but it will be a fall in the nominal exchange only. It won't be a fall in the real exchange rate and it will do absolutely nothing for the recovery in that trade. Our ability to conduct monetary policy in a way that is helpful to the economy and helpful to the recovery depends absolutely on our commitment and belief in our commitment to sound money, which means a 2 percent inflation target over the medium run."
"We're saying that, as a matter of analysis, that we believe that the real exchange rate needs to fall compared with where it was a few years ago to get the necessary rebalancing in the economy. As a matter of policy, when we set our instruments, we are trying to achieve the 2 percent inflation target over the medium run without exacerbating the recovery in the near term."
"Nobody on the committee thinks that QE has reached the end of the road and that it's not a useful instrument anymore. We stand prepared to do more, if we judge that necessary."
"We are, in today's language, (doing) flexible inflation targeting but without ever, ever taking our eye off medium-term inflation expectations. None of this, I trust, is resiling from a commitment to sound money and that's the thing of which you need to be repeatedly assured."
"I think, as I said in my annual essay to you, that with the euro area risks having receded somewhat, that actually the QE we've done gained traction and helped the recovery and spending. I wrote that of course before the Italian election results and we'll have to see just how potent (an) effect they have on markets and on sentiment."
On the bank's efforts to spur growth:
"In more normal circumstances, those easier financial conditions would have provided a strong stimulus to real spending in the economy, through higher wealth and a lower cost of borrowing for many households and businesses. But during much of 2012 the transmission of policy into spending was dampened by pervasive fears about the international environment and general uncertainty about the recovery."
"I would also judge that the existing degree of monetary easing from QE is likely to gain more traction on spending than it had last autumn, given reduced tail risks from the international environment. I remain open to doing more QE depending on the outlook for demand and inflation."
CHARLES BEAN
Q: "Do you have a desire for the direction of travel (of sterling)?"
Bean: "No, absolutely not. The market will take the exchange rate where it will."
"We do look at issues like do we think the risk to sterling might be in one direction or another? So, for instance, if we're running a current account deficit, as we were for the decade before the financial crisis, we did repeatedly say that at some stage we thought there would be a need to be an exchange rate depreciation to rebalance the economy and eliminate the current account deficit."
"There has been some rebalancing but not anywhere as much as we would liked to have seen."
"You might take the view: well, we need an even bigger depreciation (of sterling) to make exports, goods and other services more competitive and to lean even more against imports... I'm not convinced that we necessarily need a nominal depreciation to get that."
On ways of improving firms' access to working capital:
"It will be something that we will work on, inside the banks."
"The downgrade is largely a reflection of the economic developments in the economy. I don't regard it as having a great deal of news in and of itself."
"It's obviously significant in the political sphere but in the economic sphere the impact of disappointing growth, a slightly worse fiscal position that the government expected and so forth - that was already being gradually discounted into government bond yields."
"The markets largely had been expecting a downgrade and possibly other ratings agencies may follow suit. This is of course just one notch, (there are) a lot more notches to go, but the actual downgrade, from an economic perspective, I don't see adding anything new."
On timing of bringing inflation back to target:
"Certainly I have never subscribed to the view that there was something magic about the two years. The whole reason that we introduced the extra year into the forecast ... was precisely to try and get people away from focusing rigidly on the where our central projection was two years out."
IAN MCCAFFERTY
On flexible inflation targeting:
"I along with the rest of the committee are flexible inflation targeters. The Bank and the MPC has been a flexible inflation targeter since its inception back more than 20 years ago now. From that point of view I think I would refer back to some comments that were made in the past by both the current Governor and the previous Governor of the Bank of England, we have to delivery over the medium term a low and stable inflation rate but at the same time we have to be mindful of the fact of causing undue volatility in output in the short term at the same time."
"I think the issues are probably more acute as we speak than they have been for much of the history of the MPC, the circumstances are more difficult, both inflation and GDP growth are more volatile currently than they have been for much of that history, and as a result the bank has had to exercise that flexibility probably more explicitly over the course of recent years than it perhaps did five or 10 years ago."
On risks of a euro zone break-up:
"I think the risks of the immediate break-up have receded over the course of this year, both of the actions of the ECB and of the manifest choices of the political parties and their electorates across Europe ... I think that does mean the immediate risks of the break-up have receded albeit that as we've seen overnight, politics is difficult to predict - certainly in the case of the Italian elections and as a result risk still remain."
DAVID MILES
"I think where we are at the moment is a situation where on the central forecast - which is that inflation is near the target level but somewhat above it two years ahead but pretty much at it by the end of 2015 - to my mind, that is consistent with the spirit of the remit."
On the correct horizon for bringing down CPI (Other OTC: CPIC - news) :
"I haven't changed my interpretation of what that means... I have always thought that the remit defined flexible inflation targeting and that remit hasn't changed."
"I think it's a matter of judgment what the trade-off is between trying to move inflation back in a very short period as opposed to a slightly longer period. It depends very much on what the reason (is) why inflation may have moved away from it."
"One thing on the euro zone situation, I think in some sense the risks of things going badly wrong in the euro zone is absolutely crystallised. Many euro zone economies are going backwards at a rate of knots, overall growth in the euro zone in the last year or so has been close to zero so I don't think this is something that could go wrong, it has gone wrong, and I think that the projections we've made in the inflation report are really based on the assumption that growth remains very weak and anaemic..."
(Reporting by UK economics team)
