King remains dovish about UK outlook
BANK OF ENGLAND governor Mervyn King yesterday staunchly defended the continued need for ultra-loose monetary policy but warned that high inflation could continue to erode households’ earnings power over the next year or so.
Speaking in front of the Treasury Select Committee, King denied that the strong second quarter GDP growth reading meant that the Monetary Policy Committee (MPC) could put its foot on the brake. He even suggested that policy would be loosened further if required.
“The debate is about the appropriate degree of stimulus, not about applying the brakes. I am arguing that we have room to use monetary policy in either direction. I don’t want to prejudge where it will need to go,” he said.
“The wider economic problems around the world underline the fact that we can’t be confident that the recovery in demand, output and employment here in the UK will be sustained,” he said.
Consequently, King indicated that the MPC was unlikely to raise rates to curb expected high inflation. “Given the changes to VAT announced in the Budget, it’s likely that inflation will remain above target for much of next year,” King warned.
“There will come a point when we will certainly need to ease off the accelerator and
return the bank rate to more normal levels. But I fear there is some considerable distance
to travel before we can begin to use the word ‘normal,’” he added.
However, there were further clues yesterday as to how the central bank would conduct a tightening of monetary policy. King said that any plan would be coordinated with the Debt Management Office and added: “We shouldn’t begin new sales until we are in a position where we are fairly confident that we want to embark on this degree of tightening over, say, the following six months.”
Paul Fisher, executive director for markets at the Bank and MPC member, added: “We would expect interest rates to be changed first and then we would announce a programme of sales of the assets to take place some time shortly after that but over a period of time to give the markets some certainty of the pace at which we would sell the assets.”