UPDATE 1-BOE’s Bean-Further policy action may be needed

(Recasts, adds details)

JACKSON HOLE, Wyo., Aug 28 (BestGrowthStock) – The global recovery
is fragile and policymakers in advanced economies might still
have to provide further economic support, Bank of England
Deputy Governor Charles Bean said on Saturday.

In a paper presented at the annual central banking
conference organized by the Federal Reserve, which this year is
focused on monetary policy lessons from the recent crisis, Bean
said policymakers had succeeded in preventing a financial
market collapse.

“Even so, the deleveraging process is incomplete, the
recovery remains fragile and a considerable margin of spare
capacity is yet to be worked off, while further policy action
may yet be necessary to keep the recovery on track,” he said,
according to the text.

Bean’s comments come as pessimism about the global outlook
increases and talk of further stimulus measures creeps back on
to the agenda at the BoE and other central banks.

Most analysts, however, expect the BoE will keep policy on
hold well into next year.

The Fed at its August meeting said it would resume buying
long-term Treasury securities to support the flagging recovery.
Former Fed Vice Chairman Alan Blinder, commenting on Bean’s
paper at the conference, said he believes the U.S. central bank
will take further action to ease financial conditions in coming
months.

The rest of Bean’s speech was devoted to examining whether
there were fundamental flaws in the existing policy
frameworks.

He gave evidence to support the idea that periods of
economic stability might encourage exuberance in credit
markets. But he argued it would be a mistake for policy-makers
to try to induce fluctuations in the economy to prevent
financial market participants becoming too confident about the
outlook.

He also said monetary policy was probably too weak an
instrument to moderate credit or asset booms without hurting
activity too much.

“Instead, with an additional objective of managing credit
growth and asset prices in order to avoid financial
instability, one really wants another instrument that acts more
directly on the source of the problem. That is what
macro-prudential policy is all about,” he said.

Bean also said buying securities is an effective instrument
for a central bank to ease financial conditions in a crisis,
but short-term interest rates should be the tool of choice in
normal times.

“Asset purchases aimed at flattening the yield curve are
probably best kept in the locker marked For Emergency Use
Only,” said the paper written by Bean and co-authors.

It also said raising inflation targets from the current
norm of around 2 percent does not seem a productive way to pull
economies out of slumps.

“There is a risk … that even a modest increase in the
target of a few percentage points could lead to a corresponding
increase in inflation volatility and associated welfare
losses,” the authors wrote.
(Reporting by Mark Felsenthal and Sumeet Desai in London,
Editing by Chizu Nomiyama)

UPDATE 1-BOE’s Bean-Further policy action may be needed