By David Milliken
LONDON (Reuters) - The Bank of England may need to make its main tool to smooth out swings in bank lending more powerful to combat future economic downturns if interest rates stay low for a long time, Deputy Governor Jon Cunliffe said on Monday.
His comments chimed with those from other members of the BoE's Financial Policy Committee who have suggested that the BoE's counter-cyclical capital buffer -- designed to restrain lending during boom times and unleash it during downturns -- may not be potent enough in its current form.
"Releasing buffers can have a powerful effect in a downturn by reducing the pressure on banks to cut back on lending and so avoid a credit crunch amplifying the macro-economic shock," Cunliffe said in a speech to the Society of Professional Economists in London on Monday.
"The question perhaps is whether that buffer needs to be made more powerful in a low for long world given the greater risk of severe downturns."
Cunliffe also gave the biggest hint to date that the BoE could be looking at bringing in macro-prudential tools for market-based finance, a term used to describe funding for investments from outside the banking system, for instance by asset managers.
"The macro-prudential toolkit is not complete. In most jurisdictions it is far better equipped with tools to identify and mitigate risks arising in the banking and insurance sectors than in market based finance," Cunliffe said.
"This gap needs in my view to be addressed."
Cunliffe said any reworking of the relationship between the BoE and Britain's finance ministry to provide more help to the economy must be handled very cautiously.
Responding to questions after his speech, he also said it was too early to say that more coordination between monetary and fiscal policy was needed.
Earlier on Monday the finance ministry said rules for the budget will be reviewed and that they would "keep control of our national debt".
"Whether and how monetary, and perhaps fiscal, frameworks should adapt to a world of structurally low interest rates is a related but separate issue which is receiving considerable attention from academic research and, more recently, policy makers in some jurisdictions," Cunliffe said.
"Discussion is at a relatively early stage and these are, in my view, issues that would need a great deal of careful deliberation."
On Brexit, Cunliffe pushed back against the widespread view among economists outside the BoE that it would almost certainly be forced to cut interest rates in the event of a no-deal Brexit to help prop up demand.
"What we do doesn't always get reflected in what people think," Cunliffe said in response to a question after his speech, adding that some people had not expected the BoE would raise rates, as it has done, before any Brexit transition deal.
On Friday BoE Governor Mark Carney said it was his view that the BoE would do "whatever we can" to support growth in such a Brexit outcome.