MPC’s Miles: QE didn’t create bubbles – it stopped an anti-bubble


A senior Bank of England official has refuted criticism that quantitative easing has created fresh asset bubbles in the world’s financial markets.

Speaking at the Global Borrowers & Investors Forum in London, external Monetary Policy Committee member David Miles argued that the Bank’s QE programme has helped to stop an ‘anti-bubble’ – or a downward spiral in asset prices – rather than artificially propping up markets.

“There is a world of difference between supporting asset prices so as to prevent a self-reinforcing downward spiral in values and creating a bubble,” he said. “Indeed preventing a downward spiral – because it stabilises both asset prices and the wider economy – is pretty much the opposite of blowing up a financial market bubble.”

Examining equity markets, Miles noted that a few weeks ago the FTSE All-Share “was about back where it was in the summer of 2007” after falling about 40 per cent between mid 2007 and early 2009. However, in inflation-adjusted terms stocks were still about 20 per cent down from their 2007 peak.

In addition, the economist said the price to earnings ratios on the FTSE All-Share do not look “unusually high” and are below the average of the 10-year period leading up to the crisis of 2007-08.

Miles also conceded that yields on UK government debt are “unusually low”, even after the sell-off that was prompted by the US Federal Reserve setting out a tapering path for its $85bn-a-month bond-buying programme. However, he pointed out that low gilt yields reflect the belief that the Bank is likely to keep the base rate at low levels for some time and the premium on safe assets after the financial crisis.

“So there are good reasons why yields on safe government bonds should be low today,” he said. “I think some people are far too quick to label this a ‘bubble’ – which I would define as a level of prices far removed from what can be expected given the fundamental economic forces at work in the wider economy.”

The economist also argued that the Bank could eventually unwind its £375bn QE programme without creating chaos in the markets, as he expects this to happen when they are “operating more normally” and portfolio changes are likely to have an impact on prices.

He added that the Bank’s focus should remain on stimulus, putting him at odds with Fed chairman Ben Bernanke who has started preparing the markets for tapering.

The MPC member said: “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.”

Miles joined the MPC in June 2009 and is also a professor at Imperial College London, where he was formerly head of the financial economics department.