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King says yet to see bulk of QE impact

Source: Reuters - Tue 23rd Feb 2010

Bank of England Governor Mervyn King and fellow Monetary Policy Committee members Charles Bean, Spencer Dale, Kate Barker and David Miles took questions on the February Inflation Report from parliament's Treasury Committee on Tuesday.

Following are highlights from the session.

KING ON LIMITS TO REGULATION

"There are very good reasons for thinking that in future it would be much better to put at least some weight on putting in place fire breaks and fire walls in different parts of the financial sector and not relying on getting regulation absolutely right.

"There is plenty of scope for improving regulation which needs to be done. But you can't get regulation exactly right.

"Risks will occur that are very hard to anticipate in advance."

KING ON RISKS TO CPI

"The factors that loomed very important in our decision (to pause QE) ... first of all that inflation is very much above target now and it will stay there for a while. We don't want to run the risk of inflation expectations moving up and being dislodged from the target.

"There are risks there could be further upward movements, whether it be commodity prices or other changes in indirect taxes, who knows? And the second reason is it seemed to us to be a very good time to take stock of what we've done." 

KING ON BANK LENDING

"We would like to get back to a situation where the banking sector can expand its lending, but I am not sure that is going to happen until we have seen further consolidation in the balance sheets of the banking sector - there's still quite a way to go on that front."

KING ON GREAT DEPRESSION RISKS

"The measures which we have taken, and the measures which other central banks have taken around the world, have all contributed to a reversal of that concern that we would see a re-run of the Great Depression. And those serious downside risks, I think, have now been eliminated."

BOE DEPUTY GOVERNOR CHARLES BEAN ON STERLING, EU

"What we've seen so far is exporters primarily taking the benefits of the depreciation in terms of increased profit margins rather than cutting prices to expand sales.

"So I am not altogether surprised that we haven't seen a large effect yet from the depreciation, but I would expect it to be working through over the course of this year and into next year. The precise speed at which that happens though may well depend on the strength of the recovery in overseas markets."

"We expect the euro area to have a sluggish recovery in very much the same way as the UK will."

KING ON OPTION OF MORE QE 

"We stand ready to do whatever seems appropriate."

KING ON RATING DOWNGRADE RISK

"I don't think anything has changed (regarding the risk of downgrade) and I think we are very different from Greece."

"I think it is very clear we have political consensus on the need for fiscal consolidation."

"We have a very good track record in the past at meeting our obligations. We have our own currency which gives us greater freedom of manoeuvre and we also have a public debt which has a much longer maturity so that we are not faced with the same rollover refinancing problems which affect many other economies."

"We do have a very large fiscal deficit and we have yet to tackle that and I think the rating agencies are bound to remain somewhat uncertain until we see measures clearly announced and defined that will deal with that fiscal deficit over the lifetime of the next parliament."

"I don't believe the rating agencies are concerned, in the sense that they are not re-rating the UK and I would be very surprised if they were to do so, I think they expect, as we all do, that either in the next budget or after the general election measures will be announced that will make clear precisely how this deficit will be tackled."

KING ON DEALING WITH DEFICIT, BANKS

"What really matters is the combination of a political consensus to deal with our problems, both in terms of fiscal deficit and in terms of dealing with the banking sector, and the fact is we have a track record of doing that. 

KING ON REDUCING DEFICIT

"I'm sure the rating agencies and the markets will be looking ... for a more detailed explanation of exactly how that structural fiscal deficit will be brought down over the lifetime of the next parliament."

"You certainly can't eliminate the deficit in one year, there has to be a programme announced that will start and continue right through the lifetime of the next parliament."

KING ON PUBLIC SPENDING

"I honestly think that much of this debate is being overblown because even if you announce a programme ... to the extent that a significant part of the fiscal consolidation will come from measures or adjustments to public spending, it is very difficult to make those changes to take effect immediately."

"It is inevitable it will take time before these measures come through."

KING ON WHETHER MORE QE WILL BE NEEDED

"It may be. We'll have to see how things pan out. My particular concerns at present derive from the state of the world economy and our largest trading partner, the euro area.

"Despite the depreciation of sterling we haven't so far seen much evidence of a pickup in net trade in the UK, which is an important part of our rebalancing. 

"This is a decision we look at month by month."

BARKER ON PROPERTY MARKET

"I certainly think it's true we aren't necessarily out of the woods as far as the commercial property sector is concerned.

"We've seen some pick up in parts of the sector. Some pricing has improved, particularly in prime property, but it's certainly apparent that some of the loans the banks have made to commercial property remain under water. And it's certainly possible that if we don't see the recovery taking hold through this year we will start to see -- we've seen a lot of forbearance so far -- it's difficult to work out whether that will continue.

"It is possible we will see an aftershock in some parts of the commercial property sector."

BARKER ON HOUSING

"We did also have the change in stamp duty which may have had a temporary effect. But the most significant question is how far is mortgage lending going to be constrained going forward, given the difficulties with bank finance. It seems more likely than not to me that mortgage finance is clearly not going to be available going forward on the terms it used to be. It seems to me there are still adjustments in the housing market."

"I was rather surprised by the strength of prices in the housing market through last year and it's possible some people delayed decisions to move or put houses on the market. In some sense that can't continue. It's also possible the housing sector will be quite weak through this year."

MPC MEMBER DAVID MILES ON NOT RAISING QE IN FEBRUARY 

"I think it, for me, was a pretty finely balanced decision.

"On balance I felt that keeping the stock of purchases in place, which is really maintaining extraordinary expansionary monetary policy was on balance the right thing to do this month. It's a decision that is finely balanced, it's one we'll come back to in future meetings.

"If the news is that the economic outlook seems even weaker, inflation pressure is lower and that moves down that profile, I think there is strong case then expanding further the asset purchases. If it goes the other direction, that would be a case for pushing in the other direction."

KING ON UPSIDE CPI RISKS

"If we felt the main risks to inflation were on the upside to the target rather than the downside, that would clearly be a signal for us to start thinking about tightening monetary policy."

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