New rate-setter backs austerity, reserves view on QE

LONDON (Reuters) - New Bank of England policymaker Ian McCafferty took a cautious line on the need for another cash boost to the recession-hit British economy, saying his decision would hinge on a clearer view of the economy's health.

McCafferty's first public comments since joining the Bank's nine-strong Monetary Policy Committee contrast with the views of his predecessor Adam Posen, who was the most vocal advocate of additional easing measures.

McCafferty warned of the dangers to Britain's economy from the euro zone debt crisis, but also said that inflation could fall back more slowly than predicted due to a recent rise in the costs of oil and other commodities.

Most economists expect another dose of asset purchases once the current round of 50 billion pounds' worth of bond buys is completed in November, although a jump in exports in July added to signs that the economy is moving out of recession.

McCafferty, who most recently served as the Confederation of British Industry's chief economic adviser, also threw his weight behind the government's austerity drive.

In his appointment hearing in parliament's Treasury Committee on Tuesday, McCafferty resisted attempts to pigeonhole him as someone who was more focused on either inflation or broader growth concerns.

"I am neither a hawk or dove. I will be looking at the evidence in each meeting, on the basis on the best data that we have, to make a decision on the basis of current policy."

This applied to McCafferty's views about further expansion to the Bank's purchases of 375 billion pounds' worth of gilts.

"We are ... in a position of significant uncertainty about quite where the economy is at this stage," he said. "As a result, I would like to see more evidence before I would make any decision on whether QE needs to be extended further or not."

Fellow policymaker David Miles, who is now the most dovish member on the MPC, said in an opinion piece for the Evening Standard newspaper that quantitative easing was the best tool for now and rejected alternative policies such as money-financed spending dubbed "helicopter drops".

BoE watchers noted that McCafferty seemed to leave the door open to a vote for more asset purchases in November.

"What does seem clear though is that Mr. McCafferty will not be as dovish as his predecessor Adam Posen, which suggests that there will be some changes in the dynamics within the MPC," said IHS Global Insight economist Howard Archer.

AUSTERITY SUPPORT

Britain's economy has been back in recession since late 2011 according to official gross domestic product data, though unemployment has been falling and a recent Manpower survey showed that companies planned to hire more staff.

A strong surge in exports in July helped reduce Britain's trade deficit to its lowest level since February 2011, in another sign that the economy could post some growth in the third quarter.

McCafferty said the economy was probably in slightly better shape than indicated by official figures showing three quarters of contraction.

But he warned a deeper recession in the euro zone and a slowdown in the United States and China could hit demand for British exports and uncertainty kept many businesses from investing.

"Domestically, the main downside risk lies with the consumer," he said. Consumer spending may fail to pick up as expected if inflation fell more slowly than thought," he said.

While McCafferty took the central bank's position that the stimulus through bond buys with newly created money was still working, he also noted the limits of monetary policy when it came to boosting firms' confidence to invest.

The lack of growth has put pressure on chancellor George Osborne to loosen his austerity drive and boost the economy through infrastructure spending.

But the new central banker made clear he thought Osborne should stick to his plan to erase the budget deficit over the next five years.

"He needs to maintain the austerity programme because otherwise ... there are risks that we will see disruption in the financial markets, and that would steepen the (gilt) yield curve and significantly damage what we are trying to do at the bank," he said.

(Additional reporting by Li-mei Hoang, Alessandra Rizzo, Alessandra Prentice, Peter Schwartzstein and Olesya Dmitracova)

Source: http://news.yahoo.com/bank-england-voter-reserves-judgement-qe-115125394--business.html

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