Bank of England's Miles sees good reasons for low gilt yields

British government bond yields have good reason to remain low, despite a recent jump due to market expectations that the U.S. Federal Reserve may scale back its bond purchase programme, a senior Bank of England official said on Wednesday.
David Miles, an external member of the BoE's rate-setting Monetary Policy Committee, said the still-low current level of gilt yields appropriately reflected investors' risk aversion and market expectations that Bank of England rates will stay low.

He also raised the prospect that the BoE may hold some of the 375 billion pounds of gilts bought under its asset purchase programme indefinitely, even after monetary policy returns to normal - in contrast to the general assumption that almost all would be sold back to the market.

Miles's comments, in a speech to be delivered to a bond investors' conference, come less than a day after BoE Governor Mervyn King said that markets had "jumped the gun" by starting to price in tighter monetary policy.

Ten-year gilt yields hit a 20-month high of 2.597 percent on Monday, having risen almost 50 basis points since Federal Reserve Chairman Ben Bernanke said last week that the U.S. economy is growing fast enough for the central bank to slow its bond-buying stimulus later this year.

Miles dismissed the idea that this marked the beginning of the end for what central bank critics say is a bubble in government bond prices caused by too much quantitative easing.

"Yields on UK government debt - both in nominal and real terms - are unusually low," he said. "(But) there are good reasons why yields on safe government bonds should be low today. I think some people are far too quick to label this a "bubble"."

The good reasons for low British government bond yields included investors' substantially greater risk aversion than before the financial crisis, and expectations that the BoE would keep offical interest rates low, Miles added.

Miles, a finance professor, has consistently voted for more BoE bond purchases since November and effectively endorsed market expectations for more loose monetary policy.

"I do not think we should be in any hurry in the UK to move the monetary policy dials back to more normal settings - indeed it might well be right for the next move in the UK to push them even further to give more support to demand," he said.

When the time did come to tighten monetary policy and sell back gilts, more normal market conditions should limit the impact on gilt prices, he added.

Miles, whose non-renewable term on the MPC expires in May 2015, also floated the possibility that the BoE might want to hold on to some gilts as a counterweight to increased cash deposited by commercial banks.

"It is very far from clear that returning monetary policy to a normal setting means that the Bank of England balance sheet will shrink back to where it was before the crisis," he said.

Article Source :http://uk.reuters.com

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