SIR MERVYN King last night paved the way for yet another dose of quantitative easing, as the Bank of England flexes its muscles in a bid to stoke the recovery.
Speaking on the day that the government’s debt was revealed to have passed the £1 trillion mark, King warned of “dark clouds hanging over the world economy”.
Data due today will indicate if the UK economy shrank at the end of 2011.
Yet King has confidently predicted that inflation will tumble this year, leaving scope for a boost to the latest quantitative easing programme.
“There is scope for interest rates to remain low,” he said in Brighton last night. “And, if necessary, for further asset purchases, to prevent inflation falling below the two per cent target.”
Since deciding to start a new phase of easing in October, the Bank has been buying up a further £75bn in assets, taking the total splash to £275bn.
The Monetary Policy Committee’s (MPC) arch-dove Adam Posen used a speech on Monday night to encourage his colleagues to consider even more QE at this month’s meeting. Last night’s comments suggest King is singing from the same hymn sheet.
High debt levels in the UK and abroad make the road to recovery “arduous and long”, King said. “The continuing need for banks, households and nations to reduce their indebtedness is part of the broader story of the unwinding of the imbalances in the world economy,” he said.
The target of policy must be “to ease the transition of the economy to the new equilibrium, smoothing its passage through troubled waters.”
King also used his speech to emphasise the need for a healthy and competitive banking system, while hitting out at a “small elite” of “disproportionately” remunerated bankers.
“Those taking decisions on remuneration, in the financial sector and elsewhere, need to understand that a market economy rests not just on incentives, but on the acceptance that the distribution of rewards is fair,” King said, adding that support must be earned for market systems and open international trade.
Last night the International Monetary Fund slashed its forecast for global growth this year to 3.3 per cent, down from its previous prediction of four per cent expansion. The UK’s forecast was cut to 0.6 per cent, from an earlier expectation of 1.6 per cent growth.