–Monetary Policy Can Respond If Recovery Slower Than Expected

LONDON (MNI) – The road to recovery is unlikely to be straight,
with considerable uncertainty over the economic prospects for the UK’s
major export markets and business and consumer confidence weakening,
Bank of England Governor Mervyn King in a speech to the Trades Union
Congress annual conference.

King painted a picture of an erratic recovery, highlighting the
weakness of money growth and the inability of the UK banking sector to
finance the recovery ‘on the usual terms’. He said monetary policy could
respond if the recovery proves slower than expected.

The BOE Governor also the used the speech to call for radical
reform of the banking sector, which he said had failed the country as a
whole, generating a financial crisis that unfairly impacted the broader
economy.

He defended fiscal tightening, saying the budget deficit had to
be brought down, but said monetary and fiscal policy could act to offset
any weaker-than-expected growth.

“If the recovery is slower than expected then the automatic fiscal
stabilisers – the lower tax receipts and higher spending that result
from weaker growth – will act to stimulate demand. And monetary policy
can react too, especially when there is a credible plan to reduce the
deficit,” King said.

He warned of the roadblocks to a robust recovery.

“In the wake of the worst financial crisis ever, the amount of
money in our economy – broad money – is now barely growing at all,” King
said.

“The road ahead is unlikely to be straight. There is considerable
uncertainty about the prospects for both the United States and the euro
area – our most important export markets,” King said.

“Business and consumer confidence at home has weakened recently,
and it will be some time before our banking sector is able to finance a
recovery on the usual terms. The transition to a better balanced economy
will be difficult. But we are already seeing encouraging signs of
expansion in manufacturing and UK exports,” he said.

King said that growth in the UK has been “somewhat faster” than
expected a year ago, but “total UK output remains around 10% below where
it would have been had the crisis not occurred.”

He also called for action to resolve the continuing imbalances in
the global economy.

“We need to resolve the problems caused by massive capital flows
from poor to rich countries. Yet the imbalances are growing again. This
problem can be tackled only by international cooperation – most
obviously through the G20,” he said.

He called for “radical reform” of the banking sector, saying “The
costs of this crisis will be with us for a generation. And we owe it to
the next generation to seize this opportunity to put in place the
reforms that will make another crisis much less likely and much less
damaging.”

–London newsroom 0044 20 7862 7491; email: drobinson@marketnews.com

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