UPDATE 1-BoE's Posen leans towards 75 bln stg in extra QE

Thu Feb 2, 2012 1:34pm EST

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By David Milliken and Sven Egenter

LONDON Feb 2 (Reuters) - Bank of England policymaker Adam Posen looks set to vote for another cash injection for the faltering British economy next week, and expressed some confidence that other central bankers may join him.

Posen suggested on Thursday that he might vote for an extra 75 billion pounds of quantitative easing next week - at the upper end of analysts' predictions - as forecasts suggest inflation will fall sharply.

On Wednesday the BoE completed the 75 billion pounds of gilt purchases that it started in October, and most economists polled by Reuters expect the central bank's Monetary Policy Committee to raise the purchase target by 50 billion pounds on Feb. 9.

In an interview with financial news channel Bloomberg TV, Posen gave the clearest commitment from any MPC member to date that he was planning to vote for more QE. "I am certainly leaing towards doing more QE if we don't change the forecast," Posen said.

Asked if another injection of 75 billion pounds would be needed, Posen responded: "If you're looking at what the market rate projections are, that seems reasonable. I thought 75 billion was a good slug last time and I think there's a case to do it again."

Posen said he could not predict the other eight Monetary Policy Committee members' votes.

In a Reuters interview last week, MPC member David Miles said the key issue for him was that inflation was dropping rapidly, in line with the BoE's November forecast, though he said it would be presumptuous to assume QE was a done deal.

The BoE predicted in November that inflation would fall below its 2 percent target in the second half of this year, and governor Mervyn King said recently that the fall in inflation provided the scope for further quantitative easing if needed.

Posen indicated that he believed other MPC members were also seriously considering more asset purchases. "I think the governor came out pretty clearly in his recent public statements, and other members of the committee such as Ben Broadbent and Martin Weale have given public statements recently. I think there is reasonable consensus on the committee about the broad outline of the forecast."

CREDIT INFRASTRUCTURE

In a presentation at the London headquarters of Britain's Trades Union Congress earlier on Thursday, Posen said that the BoE might need to consider buying assets other than gilts to help boost smaller businesses' access to loans.

These comments sent gilts lower versus Bunds, though Posen stated that his view was not shared by all other MPC members, and ultimately the decision was up to the BoE's executive board, which does not include external MPC members such as him.

Posen said that he was concerned that ideas he had broached about so-called 'credit easing' - which received a favourable reception at Britain's annual political party conferences in early October - had lost momentum.

TUC General Secretary Brendan Barber, whose trade union members are major funders of the opposition Labour Party, said government efforts so far to boost lending to small businesses had failed, and was broadly sympathetic to Posen's ideas.

Bank lending is a contentious political topic in Britain, where the government has been the major shareholder in two of the country's biggest banking groups, Royal Bank of Scotland and Lloyds Banking Group, since recapitalising them in the 2008 financial crisis.

More competition in the banking sector would help this, and so too would government initiatives to standardise loan applications, share proprietary credit rating data and develop a corporate junk bond market, Posen said.

The government and the BoE needed to act together to provide seed money to develop markets in corporate bonds for medium-sized companies and in securitised packages of loans to smaller businesses, Posen said.

It was in this context that the BoE should consider buying more than just gilts as part of its asset purchase scheme.

"This is where I differ from some of my colleagues on the MPC, is that just as the ECB is demonstrating now, you can do monetary policy on things other than sovereign debt," he said.

"It would not be the end of the world if the MPC were as part of the asset purchases to buy things other than gilts in service of this structural change," he said.

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