Central bank set to reverse quantitative easing


Updated:

The pace at which policymakers withdraw their extraordinary stimulus to the economy will pose a challenge to the Bank of England in the future, the Bank's chief economist was quoted as saying on Friday.

'A challenge for the future will be the pace at which we withdraw the exceptional stimulus of the £175billion of quantitative easing (QE) the Bank of England has provided," Spencer Dale told Aberdeen's Press and Journal.

'We will have to take things month by month while keeping an eye on inflation.'

British bank notes

Boost: The £175bn injection has shaken up the economy


The pound rose almost half a cent against the dollar after the remarks, hitting a 6-week high of $1.6688 at one stage, and gilt futures underperformed their euro zone counterparts as investors bet that the chances of a further expansion of the QE programme was looking less likely.

Minutes to this month's meeting suggested policymakers felt QE was having a substantial impact and recent economic developments were also judged to have been positive, igniting concerns that no further expansion is on the cards.

In a radio interview broadcast on Friday, the newest MPC recruit, Adam Posen, said the central bank would have to reverse the stimulus in the medium term, but that policymakers were being cautious for now.

'In the medium term, meaning more than six months out, there's no question that we're going to have to reverse the extreme policy measures that we took,' he told BBC Radio Scotland in an interview broadcast on Friday.

However, Posen said policymakers were wary of making a big mistake and were therefore being very cautious, not least because there were questions over the economic outlook.

'The question is at what point is the economy ready to sustain on a private sector basis the recovery. There's legitimate discussion and difference on how close we are to that,' he said.

Paul Tucker, the BoE's deputy governor for financial stability, said in a speech last night that the asset purchase programme had helped to lessen the risk of a 'second Great Depression' but the strength of any recovery would be unclear until next year.

'So a key question over the coming period will be whether or not conditions are developing where some of that insurance could be withdrawn, consistent with leaving policy highly stimulative,' he said. 

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