By David Milliken
LONDON (Reuters) - The Bank of England needs to act "promptly as well as muscularly" to stimulate the economy and boost confidence, its chief economist said on Friday, a day after the central bank upset markets by not cutting rates.
In his first speech since Britain voted last month to leave the European Union, Andrew Haldane said the BoE needed to come up with a "package of mutually-complementary monetary policy easing measures" in time for a rate-setting meeting on Aug. 4.
- Celebrity deaths 2018: All the stars we lost too soon 46 Pictures
- Photos: Starbucks Reserve Roastery NYC reconnects you with your coffee 48 Pictures
"This monetary response, if it is to buttress expectations and confidence, needs I think to be delivered promptly as well as muscularly. By promptly I mean next month," he said.
Sterling fell almost a cent against the U.S. dollar <GBP=> after the speech, reversing some of the gains made after Thursday's surprise decision to keep rates on hold.
Investment bank J.P. Morgan changed its forecast for British interest rates after Haldane's speech, predicting the BoE would cut rates to zero next month, rather than to 0.25 percent.
Only one BoE policymaker, Gertjan Vlieghe, voted to cut rates this week, but most others said looser policy was likely to be needed at next month's Monetary Policy Committee meeting, once they had better forecasts for the economy.
Haldane did not offer any detail on what form this loosening should take, and whether it would go beyond the interest rate cuts and government bond purchases the central bank pursued during and after the global financial crisis.
More innovative measures - such as purchases of private -sector assets or incentives for banks to lend - would need approval from Britain's new finance minister, Philip Hammond, who replaced George Osborne in a post-referendum reshuffle.
J.P. Morgan economist Allan Monks said he expected the BoE to buy 75 billion pounds ($100 billion) more government bonds, and either extend its Funding for Lending Scheme, which offers banks cheap credit, or buy corporate bonds again as it briefly did in the financial crisis.
"This would pretty much leave the monetary cupboard bare unless Carney overcomes his objections to negative rates. For now we do not think that will happen," Monks said, adding he also expected Hammond to suspend planned public spending cuts.
Haldane said the central bank should err on the side of responding too aggressively, given potential doubts about the effectiveness of monetary policy at boosting demand when British interest rates are already close to zero.
"I would rather run the risk of taking a sledgehammer to crack a nut than taking a miniature rock hammer to tunnel my way out of prison," he said - though he added that he would keep in mind the risks of "ever-larger doses of the monetary medicine".
BoE Governor Mark Carney has said that - unlike the European Central Bank - he would be unwilling to cut interest rates below zero because of the damage it would do to banks' profits and ability to lend.
Carney has also said the central bank would be unable to fully offset the economic damage from leaving the EU, and that while it could influence the supply and price of lending, there was less it could do to affect demand.
Haldane said Britain's economy could slow materially in the coming quarters, but he did not see a crash.
"While the past few weeks have been a drama, there is no reason to expect this to turn into a crisis, or at least a financial one," he said.
Businesses were more likely to "trim and singe" rather than "slash and burn" hiring and investment plans, he added.
Sterling's sharp fall since the EU vote meant it was possible consumer price inflation - just 0.3 percent in May - could overshoot the central bank's 2 percent target in the foreseeable future, Haldane said.
But broader economic weakness meant big price rises were unlikely to become entrenched, he added.
($1 = 0.7480 pounds)
(Editing by Jeremy Gaunt)