Bank of England's Dale warns about risks of loose policy

DUBLIN (Reuters) - The Bank of England must guard against fuelling inflation in a stalled economy when deciding on the need for more stimulus, its chief economist warned on Saturday, showing his reluctance to sanction further asset purchases.

In a speech at a conference in Dublin, BoE chief economist Spencer Dale stressed that pumping more money into the faltering economy may not be the appropriate remedy if the weakness was caused by a hit to its capacity to grow.

"If the handbrake on your car is stuck, putting your foot further and further down on the accelerator won't get you very far before the car starts to overheat," he said.

Dale voted against the current round of 50 billion pounds of new asset purchases when it was launched in July, as he was worried the inflation outlook may not have improved enough and pinned hopes on other steps the central bank had taken.

"If output growth remains weak, we will need to assess carefully developments in potential supply as well as demand before deciding how to respond," he said. "The rates of growth enjoyed prior to the crisis may not be the correct benchmark for the next few years."

"Above all, we need to remain firmly focused on hitting our inflation target," he said.

The central bank also had to consider the potential costs of further easing, Dale said, as a long period of loose monetary policy could lure investors into taking excessive risks and delay necessary economic restructuring.

"Monetary policy can and should provide short-term support in times of need, but it must avoid becoming a long-term crutch obstructing the required rebalancing of our economy," he said.

SCOPE

Earlier this week, the Bank of England voted to stick to its current target of buying a total 375 billion pounds of government bonds with newly created money by November, and many economists expect another dose after that.

Britain's economy is slowly crawling out of its second recession since the onset of the financial crisis in 2008, but the central bank -- like most other economists -- does not expect a vigorous recovery anytime soon.

Inflation meanwhile has fallen from its peak of 5.2 percent in September to 2.6 percent in July. The central bank sees inflation falling further towards its 2 percent target later this year, although a recent rise in oil and commodity prices poses new risks.

Dale has been the most hawkish of the nine policymakers over the past year and warned repeatedly that monetary policy could stoke inflation if economic weakness was due more to reduced productive potential than a lack of demand.

Nonetheless, Dale said in his speech that despite the Bank of England's latest forecasts taking more account of a supply-side hit, he did not rule out further stimulus measures.

"Our economy remains weak. Unemployment has edged down in recent months but it remains too high," he said.

"There is scope for monetary policy to do more," he said. "If the economic outlook deteriorates further, policy can respond. We have not yet run out of road. But there are limits to how much we should ask of monetary policy."

However, Dale voiced strong confidence in the central bank's latest initiative to boost lending to businesses and households -- the so-called Funding for Lending Scheme (FLS).

"The FLS takes off the table the constraint posed by high bank funding costs ... and in my view stands a good chance of making a material difference," Dale said.

(Writing by Sven Egenter; editing by Ron Askew)

Source: http://news.yahoo.com/bank-englands-dale-warns-risks-loose-policy-112025539--business.html

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