By David Barwick – LONDON (EconoStream) – The Bank of England is not running out of monetary policy room to manoeuvre, Dave Ramsden, Deputy Governor for Markets, Banking and Resolution at the BOE and member of the UK’s Monetary Policy Committee (MPC), said on Wednesday.

Speaking at an online conference of the Society of Professional Economists, Ramsden, according to a text of his remarks made available by the BOE, said QE has demonstrated efficacy and there remain both assets that could be purchased and scope to affect prices.

Noting that Bank Rate is at a historic low of 0.1%, that the BOE’s balance sheet is at almost 40% of GDP and that market rates at all horizons are at historic lows, Ramsden said that some might take this to mean the MPC is short on policy space.

‘My own view is that this is not the case – we have policy tools still available, and scope remaining to use those tools’, he said. ‘The question is not so much what tools are available as which is the best tool for the job at hand.’

In particular, he said, QE has proved its effectiveness in stimulating demand. ‘And while it is increasingly clear its implementation and impact is state contingent, to my mind it is a tried and tested tool and for me it is the MPC’s marginal policy tool at present’, he said.

Ramsden dismissed concerns about a lack of eligible assets, observing that there remained in the market £940 billion of gilts the BOE could conceivably buy.

Although there are strictures regarding what it can purchase, he said, ‘even with those constraints applied we have considerable headroom after the current programme is completed, reflecting a range of considerations.’ If necessary, the BOE could revisit the constraints, many of them being self-imposed, he said.

As to the ‘trickier’ question of whether such purchases would impact pricing, he said, ‘my starting point is we have plenty of scope to affect prices.’ The fact that longer-dated gilts’ yields are at historic lows doesn’t mean their yields couldn’t go lower yet, he argued.

The MPC can also adjust the pace of purchases or the asset types bought, he pointed out, noting that it had purchased sterling non-financial commercial paper during the financial crisis, and that other central banks have included various other assets in their purchases.

In any event, he said, ‘the MPC has made clear that it stands ready to respond to any re-emergence of market dysfunction, and so avoid any associated tightening in monetary and financial conditions, as appropriate.’

Referring to the MPC’s current forward guidance, according to which it did ‘not intend to tighten monetary policy until there is clear evidence that significant progress is being made in eliminating spare capacity and achieving the 2% inflation target sustainably’, Ramsden said the significance of the message would become yet greater over time.

‘It provides a commitment not to tighten policy until we’re confident that it is appropriate to do so and that we have seen clear evidence that we are well on the way to recovery’, he said. The ‘key point’, he said, ‘is that our current guidance reflects the ongoing uncertainties and means that the burden of proof for any future tightening is high.’

Ramsden said he agreed with the MPC’s observation in August that negative interest rates could be a less effective way of providing stimulus. ‘That consideration still applies as far as I am concerned’, he said. ‘While there might be an appropriate time to use negative rates, that time is not right now, when the economy and the financial system are already grappling with the effects of an unprecedented crisis, as well as the myriad uncertainties the crisis has created.’

However, he said, the possibility of taking interest rates below zero is ‘certainly in the toolbox for potential use in future as my assessment of their effectiveness changes.’ The appropriateness of negative rates remains a subject of review, he said, and it would make little sense to consider a policy tool available if it cannot be deployed.

Turning to the economic outlook, Ramsden linked this to the evolution of the pandemic and the public health policy response. ‘[T]here is a real risk of a more persistent period of higher unemployment, and the recent strength in income growth might not be sustained’, he said.

The recovery of the labor market could face structural headwinds, and the supply-side economic damage could exceed the 1.5% assumed so far, he said.