London: The global economy faces the risk of a downward spiral and the Bank of England may have to consider further monetary stimulus if the situation worsens further, the BoE’s chief economist said in a newspaper interview.
Growth is slowing in Britain’s main trading partners and the confidence of the country’s exporters has taken a knock, Spencer Dale told the Daily Mail in an interview published on Thursday.
Pedestrians pass the Bank of England, in London, UK. Photo: Bloomberg
“During the summer, we thought much of that was just a temporary soft patch, but that slowing now looks more persistent,” Dale said.
The world faces a “rather nasty downward spiral”, though the loss of confidence among consumers and businesses could exaggerate how bad things really are, he said.
Dale, who ditched his call for higher interest rates in August after a “material change” in the outlook for growth, said that the momentum had shifted towards a loosening of monetary policy.
“If things continue to deteriorate we may need to consider further monetary loosening,” he said.
The Bank is now widely expected to launch a fresh round of quantitative easing, and many economists see the BoE restarting its asset purchases as early as next week as fears of a renewed recession have increased due to the escalation of the crisis in the euro zone.
The minutes of the BoE’s September meeting showed that most of those policymakers who voted to leave the stock of asset purchases unchanged at £200 billion ($313 billion) already thought the case for more easing was “finely balanced”.
The darkening international outlook dominates the ongoing debate about whether British monetary policy should be loosened and overshadows lending data released by the BoE on Thursday.
The figures show that credit growth remains far weaker than before the financial crisis, even though mortgage approvals rose more strongly than expected last month to hit their highest level since December 2009 and new lending to consumers also picked up.
“The caveat is that we are still well below average historical levels (in mortgage approvals),” said Philip Shaw, economist at Investec.
“Consumer credit figures have also gone a bit firmer. But this could also be a sign that situation for households has deteriorated and it is distressed borrowing by consumers. Overall, the economic data we have still point to an increase in QE target next week,” he added.
Many households faced a severe squeeze because soaring prices and higher taxes had eaten into their budgets.
However, BoE’s Dale said more quantitative easing was not a done deal as it was still unclear how quickly and how far inflation would fall back.
“That is why it is not just a no-brainer that we should do more QE,” he said. “We need to think about the upside risks to inflation as well as the downside risks. If it were a no-brainer we would have done it already.”
Dale said inflation was still likely to rise above 5% over the coming months, moving further away from the central bank’s 2% target.