King: we were right to hold rates
THE Bank of England could have stopped inflation rising above target but chose to prioritise economic output by keeping rates at their historic low, governor Sir Mervyn King told the City last night.
Raising interest rates “would have meant a weaker recovery, or even further falls in output, despite our having experienced the worst downturn in output and spending since the Great Depression,” King said at the Lord Mayor’s banquet at Mansion House.
Such an eventuality would have risked “undesirable volatility of output”, which the Bank is tasked to avoid, King said.
His words suggest the Bank is targeting economic growth as an equal part of its remit, alongside inflation, in a similar manner to the US Federal Reserve. The Fed has a dual mandate which includes fostering employment.
“With the freedom granted from having our own currency, the mix of tight fiscal and loose monetary policy is necessary for a rebalancing of the economy,” said King, adding support for chancellor George Osborne’s austerity plans.
Much of the West could face “seven lean years” of post-crisis slump, he warned, due to the “failure to tackle the imbalances during the seven years of plenty before 2007.”
Interest rates are only likely to rise once “domestically generated inflation” is observed, with King also citing the wide spreads between the Bank rate and many commercial rates.