LONDON The Bank of England may need to buy moderate quantities of government bonds over a longer period than before to provide background support to Britain's stagnant economy, a senior central banker said on Tuesday.
Paul Fisher was one of three BoE officials - including governor Mervyn King - who unexpectedly voted earlier this month to restart quantitative easing with 25 billion pounds ($38 billion) of bond purchases, a smaller volume than in previous rounds of stimulus.
In a speech to fellow University of Bristol alumni, Fisher said he these purchases - which do not yet have support from the majority of the Monetary Policy Committee - could be the first in a series.
"This could be the first instalment of a more prolonged run of purchases at a somewhat slower pace than previously, and with a relatively modest addition to the total by the end," he said.
"Rather than a very large, rapid programme of asset purchases to avoid an imminent slump - as was needed in 2009 and again in 2011/12 - a slower, more gradually supportive policy might be more appropriate and less risky," he added.
The central bank bought 375 billion pounds of gilts between March 2009 and October 2012 with newly created money in a policy also known as quantitative easing (QE).
Until February's Monetary Policy Committee vote became public, most economists thought - despite a weak economy that is only likely to grow 1 percent this year - that more purchases were unlikely due to persistent inflation.
Earlier this month the central bank forecast inflation would peak above 3 percent later this year, and not return to its 2 percent target until early 2016 - contributing to sterling's fall to a 2-1/2 year low against the dollar.
However, Fisher said above-target inflation was largely due to factors outside the central bank's control, and that he was reassured by low inflation expectations and modest wage rises.
"As long as medium-term inflation expectations do remain consistent with our objective, in particular as long as wage growth remains so weak ... we can and should continue to support the economy through the supply of money," he said.
Earlier on Tuesday, deputy governor Paul Tucker told legislators he was open to more bond purchases, but that "sound money" was his priority, and that much of the effect of existing purchases was still to be felt.
Tucker also said the central bank was considering how to make working capital more available to firms, and even whether negative central bank interest rates were a feasible way to boost the economy.
FUNDING FOR LENDING
Fisher said he still believed bond purchases were effective, even if their precise effect on growth could not be predicted, but the bank is also concerned that alone they do not boost the supply of credit to small businesses and consumers.
To fix this, the government and the central bank launched a Funding for Lending Scheme in the middle of last year, which offers banks cheap finance if they increase net lending.
Fisher said that so far, the FLS had lowered banks' borrowing costs and led to easier credit conditions for firms and home-buyers, but that net lending had not yet risen.
The central bank will publish a bank-by-bank breakdown of net lending in the last three months of 2012 on March 4, but Fisher played down expectations that it would show an increase.
"(It) is still quite early ... compared with previous plans which showed that lending was most likely to fall in aggregate without the FLS. I would not expect to see a return to rising aggregate quantities until we start getting data for 2013 at the earliest," he said.
Some firms and households may still be unwilling to borrow again after the scarring experience of the financial crisis, but banks still needed prodding to increase lending, Fisher added.
"It is up to the banks to deliver," he said. We do need to keep the pressure on the banks individually and collectively to make sure that they continue to pass through lower funding costs and are lending where they can." ($1 = 0.6608 British pounds)
(Reporting by David Milliken; editing by Ron Askew)