Bank's Posen says QE working

The Bank of England's unprecedented quantitative easing programme has helped Britain stave off a Japanese-style depression though the balance of risks to growth and inflation remains to the downside, policymaker Adam Posen said.

The central bank launched a 200 billion pound asset purchase scheme in March to haul Britain out of its deepest downturn in decades, and Posen said the policy seemed to have worked.

Nonetheless, the newspaper reported - without providing supporting quotes - that Posen said he had been working on a "Plan B" to restore flows of credit should quantitative easing fail.

Posen told legislators on November 24 that the central bank and Treasury should consider buying private sector assets if QE, which is focussed on buying gilts, did not work.

Posen's remarks in the interview - coupled with an upward revision to British third-quarter GDP on Tuesday - suggest that the Bank is highly unlikely to judge QE a failure.

"They (Japan) didn't respond aggressively to the initial shock with either tax cuts or monetary stimulus, and we did. And it worked" he was quoted as saying in the Daily Mail in an interview published on Tuesday.

But he said Britain was not out of the woods yet and that inflation was unlikely to be a problem.

"It is much easier to imagine a scenario where we undershoot on growth than we overshoot.

"If inflation expectations, bond market surveys, actual outcomes were trending away from our target in a real way we would act. But they are not." 

Policymakers expect a return to growth in the fourth quarter and Posen reiterated his earlier stance that while the current form of QE seemed to be working, it might have been "slightly more effective" if the central bank had been able to buy more private sector assets.

The possible "Plan B," which would aim to get cash flowing to credit-starved small businesses, would not be needed unless the economy fails to pull out of recession and banks clamp down further on lending.

"The burden on small and medium-sized enterprises in terms of credit isn't that much worse than it usually is in a recession. And that is a sign that QE is working" Posen told the Daily Mail.

The central bank is widely expected to call a halt to the asset purchases once its 200 billion pounds has run out.

Markets are also starting to fret about when it will start selling back the securities it has bought - mainly UK government bonds - at a time when gilt issuance remains high.

Posen said that the eventual end to QE could lead to some "volatility" in the gilts market, but that the market would cope.

"Even with the huge purchases the Bank of England made over the last nine to 10 months, it's such a deep and liquid market that our ceasing to purchase, if we do, will not have more than a transitional effect" he said. "There is no lack of demand for UK gilts."