–Reiterates QE Reviewed Every Month; Any More QE Will Be Via Gilts
–Reiterates 1st Unwinding Move Will Be Rate Hike Then Asset Sales
–BOE Broadbent Stresses Jubilee Will Have Bigger Impact Vs Olympics
–Says Wages, Money Growing Below Levels Needed To Hit CPI Target
–No Sign Of Inflation Expectations Moving Up

LONDON (MNI) – Bank of England Governor Mervyn King said today he
doesn’t know if the Monetary Policy Committee would agree to expand its
programme of asset purchases but said that it would continue to review
QE every month.

Speaking to the House of Lords Economic Affairs Committee today,
King said:

“I don’t know if it’s going to be required or not. We do make a
fresh judgement each month as to what we think is necessary. We don’t
just say, let’s forget it for 3 or 4 months. We do examine it every
month.

“We’re prepared to change our minds each and every month so I’m not
going to anticipate what we decide”.

Pressed on how the BOE would unwind its policy easing when the time
came, King said that it was most likely that this would come first via a
rise in Bank Rate – then by a programme of asset sales.

If more QE was done then it was likely that it would take the form
of more conventional gilt purchases rather than of private sector or
more exotic purchases, King said:

“If we were to do more, then it would be in formal gilt purchases.
That’s the way we increase the amount of money in the economy,” King
said.

King noted that the BOE’s balance sheet had expanded at the same
pace and magnitude as other central banks:

“The committee in thinking about how it would unwind the effect of
asset purchases has concluded in a preliminary way that the first move
will in all probability be an increase in Bank Rate”.

Asset sales would follow when the MPC was sure it was in a
period where policy would need to be tightened over a sustained period:

“That’d mean we’d coordinate with the DMO, and that would assure an
orderly method by which these assets would be sold. So that would be
pre-announced and carried out,” King said.

This would push up long-term rates – but that would be a good
thing, King said:

“One would expect that would then gradually push up longer term
interest rates, which would be the desired outcome, given that we would
only want to do this at a point when we’re trying to tighten policy”.

King rejected arguments that the BOE would lose money selling its
gilts at such a time, saying that the point of QE had not been to make
money but to boost growth.

“I don’t see that this is an interesting calculation. For two
reasons. One is these are assets that are effectively issued by one
party – the public sector – and bought by another. And secondly because
the real purpose of doing this is to ensure that the economy grows at a
faster rate than would have otherwise been the casefisher

King was also pressed on what the impact of the Royal Jubilee in Q2
and the Olympics in Q3 would be and suggested that it would probably
follow a similar pattern to that seen in 2011 when the bank
holidays around the Royal Wedding led to lost output at many
factories and offices.

MPC Member Ben Broadbent intervened to say that he foresaw a fall
in Q2 followed by a rise in Q3, despite the fact that the Olympics
would fall in the latter:

“We do expect that quite possibly there will be a fall followed by
a rise in the third quarter because of the additional bank holiday. We’d
expect that to happen again this year”.

Broadbent said it was the Jubilee which would have the major
economic impact, not the Olympics.

“The estimates of the effects of the Olympics are relatively small.
It’s basically the Jubilee which will lose us some output with people
taking an extra day off, and that will detract from growth in the second
quarter and add back the same amount in the third quarter”.

Broadbent said that this was not the kind of economic impact which
would call for a policy response from the BOE MPC.

King said that he didn’t think high inflation had damaged the
credibility of the UK central bank:

“I don’t think so; clearly we’re not happy with the outcome of
inflation in the last 2 years but there are points generated by external
factors which I don’t think it would’ve been sensible of us to try to
upset”.

Inflation expectations and wage deals all suggested that the BOE
had not lost people’s credibility:

“Measures of inflation expectations from financial markets are
stable and survey estimates of inflation expectations in the long term
are pretty much where they have been right through periods when
inflation did average around our target”.

“Short-term inflation expectations have come down as inflation
itself has moved down. So I think those measures are really showing
signs of loss of credibility”.

Wages were key and they were rising at a level below that
compatible with hitting the inflation target, King said.

“Most important of all, if you look at wage settlements, wage
settlements and average earnings are rising at a rate which is actually
below that that we would normally associate with meeting the inflation
target”.

He continued:

“So inflation is not reflected in more rapid monetary growth. All
the normal factors you’d associate with monetary policy to allow
inflation to get out of control, if anything the opposite – money and
wage growth – have been below the levels we’d associate with getting
back to normality”.

–London newsroom: 4420 7862 7492; email: dthomas@marketnews.com
/sanjukta.moorthy@ntkn.com

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