SPEAKERS   DM: Professor David Miles, Monetary Policy Committee EC: Ed Conway, Sky News Economics Editor

DM:   I think we're in a difficult situation where growth has been extremely low; the outlook is not for a rapid pickup in growth. I think it's right that Monetary Policy should be very expansionary - it should try and stimulate the economy; it's a difficult situation because at the same time inflation is uncomfortably above the target level, nowhere near as high as it was 18 months or so ago, when we had inflation above 5%, we are now under 3. I think we are heading in the right direction with inflation but nonetheless, the wrong side of the target level still. My judgement has been in recent months, that … to make Monetary Policy a bit more expansionary is the right strategy. But it's a difficult situation we start from, no question.

EC:    Why is it? A lot of people would look at QE and they'd say, inflation is very high at the moment, a lot of people are struggling as a result of that, the squeeze is potentially coming back this year on people's incomes - why on earth is it that the Bank of England should be, essentially, creating more money - printing more money electronically? It's something that a lot of people are very concerned about right now.  

DM:   I have taken the view in recent months that making Monetary Policy somewhat more expansionary, you know, remains the right strategy, partly because the inflation numbers I think continue to suggest the downward trajectory whilst at the same time the growth outlook remains troubling and rather weak. 

EC:    And you're convinced that an extra £25billion on top of … that would make any difference at all - there's a lot of people who are questioning that?  

DM:   Well, it's not a question of being convinced. There's huge uncertainty here where in many ways we are in unchartered territory. One has to make sort of, one's best assessment as to what might be the right strategy. The £25 billion, which of course is an enormous number - one can sometimes forget just how big a number that is; it's huge - that's a £25 billion, which, if we were to undertake that much asset purchases would be over some horizon. We would then revisit the Monetary Policy…

EC:    Well there could be more thereafter…  

DM:   There could be more or the time could come to start reversing on that, so the decisions are always about what's the setting for Monetary Policy right now; they're not a once and for all decision. Here's where Monetary Policy is, we are now going to leave it in place for many years to come.

EC:    You don't believe that there are diminishing returns to QE, that's why I asked whether you're convinced that £25 billion would make a difference.  

DM:   I think the mechanisms through which QE works remain similar to what they were in the past. The Bank of England buys gilts, some investors sell them, they then look for an alternative way to invest the money that we've created in buying the gilts; that money seeps through into the equity market, into the corporate bond market - that then affects funding conditions generally for companies and indirectly through to households and that can help make it easier to people to finance spending and particular investment. I think that mechanism is still in place; whether it's exactly as strong as it was in 2009, is a bit difficult to judge. As I say, we are in unchartered territories and the evidence is not compelling that the strength of the mechanism is identical now to what it was then. But to me it remains pretty clear that more asset purchases are a way of making Monetary Policy more expansionary.

EC:    And how much more capital do you think banks will need in the long run? You've talked about levels of perhaps 20% - far higher than they are at the moment. What would that be - kind of almost double where they are right now?  

DM:   I think that's very much a judgement for the FPC to make rather than for me as a member of the Monetary Policy Committee. What I would say though, is that those people who seem to believe that banks using more equity capital, having less debt must hold back growth, seem to me, to be putting far too much emphasis on what in some ways is I think a mistaken analysis of capital requirements. There is a view - you hear it quite often in the media - you hear many senior bankers espouse the view that somehow having banks use more equity capital is detrimental to lending; it's sucking money out of the economy; it's money that has to be put aside that a bank can't use to lend in the economy and it has to … a pot that sits in the corner and is not available to lend and is holding back growth. And I think that that makes very little economic sense. When a bank is asked to use more equity funding, other things equal if it raises more equity funding, it's got more money to lend not less - so it's quite the opposite. It's almost exactly the opposite of the impression that many people seem to give; that more equity financing means less money to lend - it's actually the opposite of that. Furthermore, if a bank really is in a situation where the amount of equity finance it has, has moved to dangerously low levels, that will weaken that bank and make it less likely that it will lend. And I don't think it's an accident - I don't think it's an accident that those banks that have had their capital position perhaps moved to a weaker level than they need in the long run, those are the banks that have actually had relatively weak lending so I just quite…

EC:    Well, that's the complete opposite of what…  

DM:   It is exactly the opposite of what in many cases has become the conventional wisdom that higher capital must mean less lending.

EC:    You are one of the UK's primary experts on mortgages; you did a report for Gordon Brown on the mortgage market, I'm curious to get your take on the Help to Buy Scheme which was unveiled in the Budget - did you have any thoughts about whether this is positive for the mortgage market; whether it's the right thing to be doing at the moment; whether it's irrelevant - what's your take on it?  

DM:   I think having the Government offering guarantees now in perpetuity doesn’t make much sense and I'm sure that is not the intention of the scheme. I think starting from the position that were in at the moment, there are all kinds of if you … to use the phrase 'non-conventional' policies that might make sense at a time when the economy is very depressed and we've certainly been using what you might call non-conventional policies here in the bank on the Monetary Policy Committee, quantitative easing, the Funding for Lending Scheme - so I think you need to draw a distinction between unconventional policies brought in, in exceptional circumstances and the overall framework that expect to last for many years.  

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