RTTNews - Tuesday, Spencer Dale, a Bank of England policymaker, said it is still early to judge the success of the asset purchase program in stimulating nominal spending, but initial indications remain encouraging.

So far, the central bank purchased a little over GBP 96 billion of assets and is on track to have purchased GBP 125 billion of assets by the end of July, Dale said in a speech at the Annual Conference of the Society of Business Economists in London.

Underlying broad money growth picked up recently and yields of gilt dropped sharply following the announcement of the asset purchase scheme. Meanwhile, borrowing costs within the commercial paper market appear to have fallen as a result of the central bank operations, Dale, who is also the BoE Chief Economist, said.

The central bank continues to review actively the case for extending its operations into other corporate credit markets. Dale noted that a criticism made against the asset purchase program is that some of the gilts purchased by the central bank are from foreign investors, limiting the effectiveness of the purchases. Dale revealed that the asset purchases would not have any economic benefit and more of the effect will come through a lower exchange rate rather than through a change in the relative price of domestic assets.

Even relatively small purchases of debt, if appropriately targeted, can improve liquidity and lower the cost of finance to businesses, he stated.

According to Dale, the single most important lesson from the current financial crisis is the need to expand the range of instruments available to policymakers to tackle emerging imbalances. He assessed that short-term interest rates are a blunt instrument available and are not well suited to the task of managing asset price bubbles and economic imbalances.

Dale acknowledged that recent events must serve as a wake up call for policymakers. He said strengthening the policy framework should lead to greater economic and financial stability. The process of increasing the robustness of the macroeconomic policy framework should be seen as continuous, not a one-off response to the current crisis, he added.

Dale said, When the time comes, the Committee can tighten policy both by raising Bank Rate and by selling assets. Inflation outlook relative to target would determine the rate at which the exceptional degree of monetary stimulus is withdrawn as economic prospects recover.

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