London (MNI) - The following is the text of the key passages of Bank of England Chief Economist Spencer Dale's written annaul to the Treasury Select Committee Tuesday. ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++

Report to Treasury Select Committee

Spencer Dale

Chief Economist and Executive Director

February 2010

Voting record since March 2009

Since March 2009, I have voted to maintain Bank Rate at 0.5%.

During this period, the Committee has provided additional stimulus to the economy by conducting a large-scale asset purchase programme. The aim of the programme is to stimulate nominal demand by injecting extra money directly into the economy. The Banks purchases of government bonds encourage investors to diversify into alternative assets, such as corporate bonds and equities. And by operating directly in commercial paper and corporate bond markets, the Banks purchases aid the functioning of those markets. Both actions help to boost the prices of corporate assets, reducing yields and lowering the cost to companies of raising funds in capital markets. Although it is not possible to identify precisely the incremental impact of the Banks asset purchases, I have no doubt that the purchases have improved the supply of overall credit, particularly to the corporate sector, and this in turn is helping to support additional spending.

The Committee voted in March 2009 to purchase 75 billion of assets. The scale of asset purchases was subsequently increased to 125 billion in May and to 175 billion in August. The main risk facing the economy during this period was that, following the very large falls in output caused by the financial crisis and the collapse in confidence, the strength of the economic recovery would not be sufficient to maintain a level of nominal demand consistent with meeting the inflation target. As such, I judged that it was appropriate to conduct an asset purchase programme and to increase the scale of the programme along the path agreed by the Committee.

In November 2009, the Committee voted to increase the scale of asset purchases further to 200 billion. However, I dissented preferring to maintain the stock of purchased assets at 175 billion. I fully recognised the potential benefits of expanding the scale of the asset purchase programme given the downside risks to the economy. However, I was also wary of the potential risks of such a policy. My main concern reflected the considerable uncertainty about the degree of spare capacity in the economy and the behaviour of inflation when output is growing at above trend rates. These uncertainties are always present, but come to the fore in situations like the current environment in which there is a very substantial degree of economic slack. In order to keep inflation on track to hit the inflation target this slack needs to be eliminated. But given the uncertainties about the precise margin of spare capacity and the behaviour of inflation as this spare capacity is being closed, there is a risk to eliminating the slack too rapidly.

I was also concerned that further substantial injections of liquidity might result in unwarranted increases in some asset prices. I did not think there was any strong evidence to suggest that the increases in asset prices seen to date had been out of line with the improving economic outlook and the desired impact of our asset purchase programme. Rather, I was conscious that the stance of monetary policy in which Bank Rate was very low and substantial amounts of liquidity were being injected into the economy increased the likelihood that asset prices may in the future move out of line with their fundamental values.

The Outlook

My view of the current economic outlook is broadly in line with the projections for GDP and inflation contained in the February Inflation Report. The considerable stimulus from the easing in monetary policy and the past depreciation of sterling should help to underpin a gradual recovery. But the headwinds stemming from the need for banks to repair their balance sheets and for the public sector to improve its financial position mean that the strength of this recovery is very uncertain. Inflation is likely to remain above target in the near term reflecting the continuing impact of sterlings depreciation, higher petrol prices and the reversal of the VAT reduction. But as these effects wane, downward pressure from the persistent margin of spare capacity is likely to cause inflation to fall back to below the target for a period.

Given this outlook, there are merits to increasing the scale of asset purchases further. A more expansionary policy would help to stimulate a stronger recovery, and so eliminate the degree of spare capacity in the economy more quickly and reduce the time that CPI inflation is likely to persist below the 2% target. But it would also entail significant risks. Some of those risks relate to the same concerns I had in November. In addition, the likelihood that inflation is likely to remain above target for a period means there is a greater chance that expectations of medium-term inflation may move upwards. My judgement in February was that these risks were best balanced by maintaining the stock of purchased assets at 200 billion.

Looking further ahead, I am confident the Committee will be able to reduce the current exceptional determined by the outlook for inflation relative to target. And the Committee has two instruments through which it can withdraw the stimulus, raising Bank Rate and selling assets. The most difficult issue will be to decide the timing of the withdrawal, but these decisions will continue to be made in an open and transparent manner.

Explaining Monetary Policy

Since March 2009, I have delivered four on-the-record speeches, given three press interviews, and made numerous off-the-record presentations to a variety of audiences. These included background briefings for market economists and economic journalists on the asset purchase programme. I have made five regional visits which involved various meetings and events with local businesses and media. As the Banks Chief Economist, I have extensive liaison with economists in the private and official sectors, both in the UK and internationally.

lcommons@marketnews.com/drobinson@marketnews.com