–Adds Detail To Version Transmitted At 1141 GMT
–BOE King: Goes Against Mandate Not To Set Policy In Line With F’cast
–BOE King: More QE If Net Trade Can’t Offset Falling Domestic Demand

LONDON (MNI) – Bank of England Governor Mervyn King said Thursday
that the Monetary Policy Committee would be ready to sanction further
asset purchases if net trade fails to pick up enough to offset the
slowing in the domestic economy.

Speaking at the Treasury Select committee, King was asked how the
MPC would respond if net trade failed to rise quickly enough as domestic
demand eased. He replied that the automatic stabilisers coming into play
would help offset that and further quantitative easing was also a
possibility.

“There are two obvious consequences of that. One is the
automatic stabilisers which would lead to the change in the level of the
fiscal deficit, so they kick in, and they are quite powerful in the
United Kingdom, with high marginal tax rates,” King said.

“The second is monetary policy where we could engage in further
asset purchases, were we to think that necessary to keep inflation on
track to meet the target.”

While the BOE Governor raised the possibility of further
quantitative easing, he was also grilled about why he believes it is OK
to take no action at present with inflation running more than a full
percentage point above target.

The BOE MPC’s central forecast is that inflation will fall back
below target in the medium term. King said it would be breaching its
remit if it set policy in a way not consistent with its view of the
inflation outlook.

“I think it would be going against the (MPC’s) remit to take
actions which were not consistent with meeting the inflation target in
the medium term if that is our view,” King said.

“What we are paid to do is to take that difficult judgement on
where we think the outlook is likely to be in the medium term to balance
both the upside and downside risks and to tell it how it is,” he said.

King said each month the MPC has to make a judgement on policy and
“if we think the right level of interest rates, or the right level of
asset purchases today, is the one to keep inflation on track to meet the
target that is what we do.”

“We are prepared to change it in any month in either direction if
our judgement does (change) in response to news,” the BOE Governor said.

King insisted to the TSC that the MPC must and would
continue to be guided by its 2% inflation target despite the persistence
of inflation above the target in recent times:

“It’s very important that we stick to our 2% inflation target and
that we explain why it is that inflation has been above the target. I
think it would have been wrong to have raised interest rates markedly
over the past year, deliberately in order to have created a deeper
recession, in order to bring down inflation that was the result
primarily of temporary shocks”.

But King added – “At some point policy will need to be normalised,
there’s no question of that”.

MPC Member Adam Posen was pressed as to why he did not share the
view of Member Andrew Sentance that a small and gradual tightening of
policy now would be a better policy move than waiting and risking a
sharper rise in rates at some future point which might derail the
recovery.

Posen replied: “I think it would be, frankly speaking, to be much
more of a shock to the economy to move policy in the wrong direction,
than to worry about the policy path over a long period of time, I think
markets would look at us very strangely as to what it is we think
is going on were we to do that (raise Bank Rate)”.

“Markets in general and citizens in advanced economies don’t
require central banks to move slowly, they require central banks to move
correctly”.

–London Bureau; tel: +442078627492;email: ukeditorial@marketnews.com

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