Economic history teaches us that a combination of tax cuts, running large fiscal deficits, substantial cuts in interest rates and more quantitative easing is likely to have a substantial impact on demand in the economy,' Morgan Stanley economist David Miles said.
Morgan Stanley economist David Miles, who is due to join the Bank of England's monetary policy committee in the summer, said today that the worst of the recession may be over.
In an interview with the Western Mail, Miles said that the central bank's interest rate cuts and quantitative easing programme, alongside the government's spending increases and VAT reduction, were likely to have a "substantial" impact on the economy in reviving demand.
"I'm less pessimistic than many of where the economy may be going," he declared.
Miles, chief UK economist and managing director at Morgan Stanley International and a visiting professor at Imperial College in London, begins his stint on the MPC in the summer. He is replacing David Blanchflower, who is stepping down in June after serving a three-year term.
Miles argued that there were reasons for being "guardedly optimistic". He explained: "The policy response to this sharp global slowdown is not just in the UK. This is very much a co-ordinated [response to the] slowdown across the globe, with policy response being not only very substantial but also extremely recent."
The Bank of England is pumping £75bn into the economy through a process called quantitative easing in an effort to ease credit conditions. Miles said: "Economic history teaches us that a combination of tax cuts, running large fiscal deficits, substantial cuts in interest rates and more quantitative easing is likely, with a certain time lag, to have a substantial impact on demand in the economy and it may well be that the worst of the recession may well be behind us. That's not a confident prediction but a judgement about what may be the case."
He conceded that the fall in lending to the corporate sector worried the Bank. He added: "I think part of the strategy of easing is to improve the availability and reduce the cost of debt to the corporate sector in the UK.
"Again it's early days but the early signs are that it's having an impact and the hope is this will have an impact on the cost of corporate debt and its availability, as the money flows through the system, making it easier for banks to lend."
He said the government's increases in spending and the cut in VAT had "only begun to have an impact within the last few months".
Author: Julia Kollewe
Source: guardian.co.uk
Date: 16.04.2009