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LONDON (MNI) – The Bank of England’s Monetary Policy Committee
stands ready to act if the inflation outlook justifies it, but it is
easy to explain the recent high inflation outturns, BOE Governor Mervyn
King said in a press conference Wednesday following publication of the
Bank’s November Inflation Report.

King said the run of recent well above target inflation outturns
were readily explicable – with sterling having fallen, commodity prices
risen and value added tax increased. He downplayed the significance of
high current inflation for policy setting.

Asked about concerns over whether the BOE would lose credibility
and inflation expectations become detached from the 2.0% target with
inflation running above it, King said “We’re always worried, and
I can’t predict what can happen.”

“We will monitor what happens and take action if necessary,” King
said.

“I don’t think it’s particularly puzzling to understand why
inflation is where it is. I think it’s very important to understand that
inflation in the last three years has moved both up and down. If you go
back to the beginning of 2008, almost three years ago, inflation was
2.1%, it then moved up to 5.2% and it went all the way down to 1.1%,
came up to 3.7% and down to 3.1%… It hasn’t moved in one direction and
has not stayed uniformally above the target,” he added.

He argued against tightening policy in response to high inflation
outturns.

“It doesn’t make sense to respond to price-level shocks in that
way. What we have to do, and the test of our credibility, is to explain
to people why we think inflation has been high and why we think it’s a
reasonable judgement that on the balance of risks inflation will be
where we think it’s going to be in the medium-term,” King said.

Biggest Risk To UK Economy From Overseas

The biggest risk to the UK economic outlook comes from events
overseas rather than domestic ones, with the world economy in dire need
of rebalancing, King told the press conference.

He said while US monetary policy was a matter for the US, the need
for a global rebalancing between debtor and surplus countries was
paramount, and policymakers around the globe have to tackle the issue.

“There’s no doubt in my view that the biggest risk we face is in
the external environment. We want and need a rebalancing. The private
sector in our economy is going to insist that there’s a rebalancing,
because they’re not going to go on increasing indebtedness,” King said.

Asked about the recent decision making of the Federal Reserve,
which has sanctioned another round of quantitative easing, King declined
to endorse or criticize its policies.

“I have no idea whether the US should inject more stimulus or not.
The Federal Reserve is in a much better position than either me or the
MPC. I have great confidence in the United States and the Federal
Reserve,” King said.

He urged the G20 to tackle the global imbalances issue.

“What is most important at present, is that given the difficult and
dangerous time the world economy is in, that the world leaders at the
G20 have a constructive approach. We’re in a position where the world
economy can be in a win-win situation, but it is also in a position
where it could be a lose-lose,” King said.

“There is a collective interest in reaching agreement on the path
of adjustment of current account balances over time,” he said.

The BOE Governor also stressed the need for a rebalancing in the
UK’s domestic economy.

“We need a rebalancing, we need consumer spending, public and
private together, to slow, we want them to slow, but we want net exports
to pick up. We need to see that rebalancing in the UK economy, which is
the key to getting back to a sustainable position, over a 5 year
period,” King said.

He denied that the fiscal picture had changed since the BOE
prepared its August Inflation Report.

On the impact of fiscal tightening he said “We haven’t changed our
views at all, we haven’t had news on it since the (June) Budget, as far
as we’re concerned. The Budget is the main news which set out the path
for fiscal policy as a whole.”

King Says MPC Divisions Inevitable

The MPC split three ways over its policy decision at the October
meeting, with MPC member Adam Posen voting for more quantitative easing
and Andrew Sentance voting for a hike in Bank Rate, with every other
member backing unchanged policy. The minutes of the November meeting
have yet to be published, although the majority again backed unchanged
policy.

King said that it was inevitable there was uncertainty at present
over what to do with policy.

“There has to be uncertainty … there’s a lot of uncertainty about
the world. I think people should not be nervous about the fact that
there’s a range of views (on the MPC),” King said.

“If I came here this morning and said ‘look at the problems and
challenges we’re facing’, the impact of the world economy, the fiscal
consolidation, the fall in the exchange rate, the rise in commodity
prices … but nevertheless, everyone has an exactly identical view with
an identical path for what that means for output and inflation you would
say, ‘Oh come off it, you can’t possibly believe that’,” King said.

“Where people should take comfort is that every member of the
committee, the central path that they would choose is one of recovery.
Not an exciting recovery, not particularly rapid, not one that uses up
all spare capacity quickly, but one of modest recovery, but with risks
either side,” King added.

The BOE Governor downplayed the threat of another housing market
slump.

“I worry about many things, I wouldn’t say that was the one that
was at the top of my list about what worries me most. We have seen a
surprisingly buoyant housing market, given that activity is about half
of what it was at the peak levels of activity before the crisis,” he
said.

“There are some signs of weakness in activity and prices and
obviously we’ll have to monitor where that goes,” he said.

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

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