Bank of England Governor Mervyn King said the Monetary Policy Committee is ready to add to stimulus again as it assesses the strength of the domestic recovery amid signs that global economic weakness is spreading.
“At this stage, it is difficult to know whether some of the recent more positive signs will persist,” King said in a speech late yesterday in Cardiff, Wales. “Should those signs fade, the MPC does stand ready to inject more money into the economy.”
King said gross domestic product data tomorrow may confirm a “zig-zag” pattern of recovery in the U.K. that is likely to continue. His comments come two weeks before officials must decide whether to increase bond purchases and at a time when the economies that have driven global growth through the crisis have shown signs of faltering.
“The storm clouds coming from the euro area have not yet lifted, and in other parts of the sky new clouds have drifted over,” he said. “China, India and Brazil, the three largest emerging market economies, are all slowing.”
The Bank of England is in the final weeks of the 50 billion-pound ($80 billion) round of quantitative easing it put in place in July. The MPC will announce its next policy decision on Nov. 8, and King said it will think “long and hard” about expanding the program from the current target of 375 billion pounds.
No Clear Direction
King “provided a characteristically downbeat assessment of the global economic outlook,” economists Chris Crowe and Simon Hayes at Barclays Plc in London said in a note. While they forecast a further 50 billion pounds of QE next month, they said the decision is unlikely to be unanimous “and, perhaps reflecting the uncertainty about the vote, Sir Mervyn shied away from giving markets a clear direction.”
The pound rose 0.2 percent against the dollar today and was at $1.5991 as of 7:35 a.m. in London.
Over the past two years, the U.K. economy has been “broadly flat,” the governor said. While Prime Minister David Cameron has insisted on maintaining his fiscal squeeze, King rejected combining monetary and fiscal policy, such as by directly financing government spending or engaging in so-called “helicopter money.”
“It is the independence of the bank that allows us to create money without raising doubts about our motives,” he said. “Just as it is crucial that governments do not control the printing of money, so too the unelected central bank must not determine the levels of taxes and public spending.”
King also said the central bank “could not countenance any suggestion that we cancel our holdings of gilts.” He said it must be able to sell the gilts to withdraw money from the economy or it risks “losing control over monetary conditions.”
While measures such as the U.K.’s Funding for Lending Scheme have helped lower bank funding costs by about 100 basis points since June, the program is temporary and the time it buys must be used to strengthen banks’ capital positions, King said. He added that all developed countries still need to make adjustments to help ensure an economic recovery.
“I am not sure that advanced economies in general will find it easy to get out of their current predicament without creditors acknowledging further likely losses, a significant writing down of asset values and recapitalization of their financial systems,” he said. “Only then will it be possible to return to a more normal provision of the vital banking services so crucial to an economic recovery.”
Slow and Uncertain
For now, the recovery is proceeding at a “slow and uncertain” pace, King said. Data tomorrow may show the economy grew 0.6 percent in the third quarter, according to the median estimate of 33 economists in a Bloomberg News survey. While that would end the U.K.’s first double-dip recession since the 1970s, economists say underlying growth is weaker.
King noted “encouraging” signs, including falling unemployment and a cooling of inflation to 2.2 percent, the closest it’s been to the bank’s 2 percent target in almost three years. Still, he said recent energy- and food-price increases may keep it “a little” above the goal into next year. King also said the economic recovery won’t happen overnight.
“There are no shortcuts to the necessary adjustment in our economy,” he said. “The problems in the world economy mean that we shall have to be patient.”
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