King hints at possibility of further QE

BANK OF ENGLAND governor Mervyn King yesterday signalled that he was open to a second round of quantitative easing to support growth and keep inflation close to target, but a leading economic think-tank will warn today that monetary policy could become too loose in response to overly-tight fiscal policy.

In a speech in the West Midlands, King said the risk that inflation will undershoot the two per cent target is at least as large as the dangers of overshooting. “A range of other indicators – growth in broad money, pay, and the pressure of demand on supply, that together are likely to be a more reliable guide to inflationary pressure looking ahead – all remain extremely subdued,” he explained.

Howard Archer at IHS Global Insight said the speech indicated that the Bank is prepared to take further stimulative action to support activity if the economy falters further.”

King’s words came as CBI data showed factory orders dropped more than expected to -28 this month from -17 in September, raising concerns over the health of UK manufacturing.

King also called on policymakers to thrash out a “grand bargain” to rebalance the global economy and avoid a 1930s-style disastrous collapse in activity. He warned it may be only a matter of time before one or more countries resort to trade protectionism.

Meanwhile, the National Institute for Economic and Social Research (Niesr) said in its UK forecast, which predicts sluggish growth of 1.6 per cent this year and next, that fiscal policy could become too tight and in response monetary policy could become too loose, possibly causing risks to price stability.

The think-tank added: “We suspect that spending cuts will be delayed and their scale reduced compared to the budget plans.” Raising taxes to fill the gap would boost growth in 2011 and 2012 and the same budget target would be reached in 2015