MPC backs funding for lending

Sarah Davidson

September 10, 2012

Speaking at the annual Money, Macro and Finance Conference at Trinity College, Dublin Spencer Dale, chief economist and member of the Monetary Policy Committee, said the FLS would work because it tackled funding costs directly.

He said: “The FLS takes off the table the constraint posed by high funding costs [and] stands a good chance of making a material difference.”

He also said a lack of understanding of monetary policy has led to unrealistic expectations and disappointment in monetary policy.

Dale hit back at commentators who claim weak growth implies monetary policy actions have been ineffective.

He said: “The Pavlovian-like response of some commentators to call for more monetary stimulus each time they observe weak output growth is not sensible. The extent to which policy should be eased depends crucially on the reasons why output is weak.”

Persistent weakness in output has been accompanied by a long-lasting period of very weak productivity growth, suggesting that the supply capacity of the economy may also have been impaired, explained Dale.

He added without MPC’s actions the “economy would be in a far worse state today”.

Despite the excitement surrounding FLS there are risks in using “unconventional policy tools” and what Dale referred to as “prolonged and aggressive monetary accommodation.”

Risk taking could increase among investors and financial institutions leading to future problems coupled with causing a delay in rebalancing and restricting the economy, explained Dale.

He also shared his concerns over the potential risk to the credibility of MPC.

Quantitative easing was undertaken to hit the inflation target but Dale is mindful that the decision looks more like monetary financing.

“However unfounded, those perceptions need to be taken seriously,” he added.

“Unless the limits of monetary policy are well understood, a widening gap may develop between what is expected of central banks and what they can realistically deliver”

“Ultimately, our job is to hit an inflation target not a growth target.”

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