* Tucker says open to more bond purchases if needed
* But full force of existing purchases not yet felt
* Negative rates and working capital scheme also eyed
By William Schomberg and David Milliken
LONDON, Feb 26 Bank of England Deputy Governor
Paul Tucker said on Tuesday he would agree to the central bank
buying more government bonds if needed and that the bank was
considering new ways to boost lending.
He also said the pound may need to weaken more, a comment
that pushed sterling to near 2-1/2 year lows against the dollar
Tucker was among six policymakers who voted against new
purchases of government bonds (gilts) this month, pitting him
against Governor Mervyn King and two other officials who backed
more bond buying, or quantitative easing (QE).
The split raised expectations in financial markets that the
Bank of England would eventually pursue more stimulus.
"I remain open to doing more QE, depending on the outlook
for demand and inflation," Tucker said in an annual report to
But Tucker also said the impact of bonds bought in the past
might yet give a greater boost to Britain's economy than so far
seen, as the initial effectiveness had been offset by concern
about the global economy at the time.
"The existing degree of monetary easing from QE is likely to
gain more traction on spending than it had last autumn, given
reduced tail risks from the international environment," he said.
Britain's economy showed no growth last year and contracted
in the fourth quarter, despite the central bank having spent a
total of 375 billion pounds ($567 billion) on its QE bond-buying
programme and with interest rates still at 0.5 percent.
When pressed by lawmakers about the possibility of more
bond-buying, Tucker said the Bank of England's nine-strong
Monetary Policy Committee had not written it off.
"Nobody on the committee thinks that QE has reached the end
of the road and that it is not a useful instrument anymore. We
stand prepared to do more, if we judge that necessary," he said.
Government bond prices were unchanged by the comments of
Tucker and other Bank of England officials in parliament.
The Bank of England has signalled it will tolerate inflation
remaining above its 2 percent target because it views the impact
of a weaker pound and some price increases as temporary.
Tucker said it was important not to give the impression the
central bank was relaxing its commitment to bringing down
inflation over the medium term. "We are, in today's language,
(doing) flexible inflation targeting but without ever, ever
taking our eye off medium-term inflation expectations."
Tucker was considered the frontrunner to take over as the
bank's next governor this year until the surprise appointment in
November of Mark Carney, currently head of the Bank of Canada.
He is also seen as tolerant of inflation remaining above
target and economists expect possible changes in the bank's
approach to reviving growth when he takes over in July.
Tucker on Tuesday raised the possibility that the BoE could
charge banks to hold their money, a move which could encourage
them to lend it to companies instead, possibly boosting growth.
"I hope we will think about whether there are constraints to
setting negative interest rates," he said when asked about
possible new options for the bank. "This is an idea that I have
raised. This would be an extraordinary thing to do and it needs
to be thought through very carefully."
The central bank joined forces with Britain's government to
create a new Funding for Lending scheme last year with a view to
boosting lending by lowering the costs of capital for banks. But
so far it has failed to have a big impact on lending to
The bank's policymakers saw "drawbacks" when considering
cutting interest rates to zero or below in the past but would
continue to consider them along with other options, according to
minutes of their February meeting published last week.
Tucker also said he was looking at how to increase smaller
firms' access to working capital.
"I would simply like to explore whether or not some kind of
working capital finance instrument could be rejuvenated."
Tucker added his voice to suggestions from top policymakers
that the pound may need to weaken more to help British exports.
"As a matter of analysis ... we believe that the real exchange
rate needs to fall, compared with where it was a few years ago,
to get the necessary rebalancing in the economy," he said.
The pound fell after Tucker's comment, approaching levels it
touched on Monday after Britain lost its AAA rating by Moody's.
The pound has been weakened recently by the growing expectations
of the Bank of England printing more money.
Tucker said the benefit of a weaker pound, such as boosting
exports, would vanish if inflation expectations rose too high.