UPDATE 2-Slower UK growth may warrant more QE – BoE’s Bean

* UK may need more QE if growth slows, euro debt crisis hits

* CPI above 2 pct target for “uncomfortably long time”

* Upward risks from commodities and inflation expectations

* 2011 GDP depends on final private demand and net exports

* UK banks safe on “very adverse” losses from euro periphery

(Adds context, analyst reaction)

By Peter Griffiths and David Milliken

LONDON, Dec 13 (BestGrowthStock) – The Bank of England may need to
inject more money into the economy if growth shows clear signs
of slowing or if the euro zone crisis has a big impact, BoE
Deputy Governor Charles Bean said on Monday.

However, Bean also said that the central bank was
increasingly concerned that high inflation would drive up price
expectations and wage demands, even if its main scenario was
still that inflation would fall back to target by 2012.

Bean’s comments about both inflation and quantitative easing
(QE) are more explicit than recent statements by other
policymakers, with the exception of Adam Posen and Andrew
Sentance who have voted for more QE and higher interest rates
respectively.

The prospect of more QE weighed on sterling, helping it
slide more than 1 percent against the euro (EURGBP=D4: )
[ID:nLDE6BC1M4]. One economist who attended the speech,
Investec’s Philip Shaw, however, said he placed greater value on
the inflation comments, as they came in the main part of the
speech rather than in a question and answer session afterwards.

Bean left open the possibility of more QE, something which
barely a third of economists thought likely in a Reuters poll at
the start of the month. [ID:nLDE6AT1WQ]

“It is certainly possible that we may well want to undertake
a second round of quantitative easing if there is a clear sign
that UK output growth and with it inflation prospects are
slowing,” Bean told a financial audience in London.

“Equally at some juncture it will be appropriate to start
withdrawing monetary stimulus. There are risks on both sides.”

Britain’s economic recovery faced significant risks from the
sovereign debt crisis in the euro zone, Bean said.

“If that unfolds in an unhappy fashion I think it is quite
plausible that it would have a significant adverse impact on the
UK. Under those circumstances, we might well want to undertake a
further round of quantitative easing.”

The BoE bought almost 200 billion pounds ($316 billion) of
government bonds between March 2009 and February this year and
slashed interest rates to a record low 0.5 percent to help pull
Britain out of its deepest recession in its post-war history.

The asset purchase programme, also known as quantitative
easing, has been on hold since February, and growth has
rebounded strongly since then.

INFLATION WORRY

The main part of Bean’s speech was broadly in line with past
BoE statements — which point to upside risks to inflation and
downside risks to growth — though it highlighted two inflation
dangers for 2011 more starkly than usual.

“First … strong global growth continues to generate upward
pressure on the prices of commodities and tradable goods more
generally,” Bean said. “Second (there is a risk) that the period
of elevated inflation causes medium-term inflation expectations
to drift up, leading to higher rates of increase of both wages
and prices,” he said.

“We shall be watching these indicators, and their impact on
wages and prices, like proverbial hawks,” he continued.

Inflation has been above the BoE’s 2 percent target
throughout this year, and Bean said the risk of a wage-price
spiral had risen because of this.

Investec’s Shaw said that Bean struck a more cautious tone
about inflation returning smoothly to target than before,
although the speech could not be cast as outright hawkish.

“I felt that the deputy governor was being a little bit more
cautious over inflation prospects than previously,” Shaw said.

By contrast, he played down Bean’s reference to QE as it
came in response to a question from the floor. “If Charlie had
wanted to give a signal about QE, he’d have done that
explicitly,” Shaw said.

GROWTH AND CPI THREATS

The BoE does not expect CPI to fall below 2 percent until
2012, due to a planned rise in value-added tax next month.

“Rapid recovery in emerging markets has reawakened global
inflationary pressures. And here in the United Kingdom,
inflation has been running above the MPC (monetary policy
committee) target for an uncomfortably long time. It may be some
while yet before normality is restored,” Bean said.

However, Bean saw plenty of threats to growth next year that
may cause inflation to undershoot rather than overshoot the
BoE’s forecasts of over 3 percent CPI for 2011.

The moderate pace of growth and the fading effects of
sterling’s past depreciation should mute inflation pressures.

Moreover, the economy faced significant challenges in the
year ahead, with Britain’s prospects depending on private-sector
final demand and net exports, he said.

Households had probably not finished reducing their spending
in response to the recession, public spending would fall and
demand for British financial services overseas may continue to
be weak.

Overall, though, British banks were well placed to weather
direct losses from adverse events in debt-heavy euro zone
countries Greece, Ireland, Portugal and Spain and the lower
level of sterling should also boost exports of goods.

“Even under a very adverse scenario, (banks) should be able
to absorb the likely losses on their direct exposures to Greece,
Ireland, Portugal and Spain without too much difficulty. There
is, though, the possibility of further indirect effects …
which could amplify the impact,” Bean said.
(Additional reporting by Fiona Shaikh; Editing by Ron Askew and
Susan Fenton)

UPDATE 2-Slower UK growth may warrant more QE – BoE’s Bean