The following is an unedited and unreformatted text of an interview with Bank of England Governor Mervyn King by ITV News. It was transcribed and distributed by e-mail by ITV today.
Q. Governor, we’ve come to the West Midlands, where you began your career. It’s a return to shop floors. How important is it to you to see shop floors?
MK: “Well it’s very important because we actually then get a feel for what is really happening in business instead of just relying on pieces of paper coming across the desk. I like to get out and meet the people running the businesses and see what goes on. You get a feel for how well run a business is. You can decide how much weight to give to the opinions. I think we’ve learned a lot by talking directly to business over the last few years. We have a nationwide network of agents and contacts across the UK.”
What have you learned today?
“What I’ve learned today is that demand for UK manufactured exports is pretty buoyant. The new position we’re in, the UK has to rebalance its economy. We have to rely more on exports than we did. This is going to correct our trade deficit. Gradually lead us back to full employment. We rely on export demand. Companies I saw today are experiencing buoyant export, particularly from Asia and North America.”
What’s wrong with the British economy, the rebalancing isn’t really happening…
“It’s because were in a process which will take a number of years to move to a position with lower spending and consumption and public spending and higher exports or producing things as a substitute for imports. That will require more business investment and I think two things are holding us back at present - one is the extraordinary degree of weakness in the Euro area. The Euro area is in recession. It’s our single biggest trading partner. The economies in or close to the area really affect about half of our economy.”
But what about Germany - they’ve done very well despite the crisis. They’ve managed. What are they doing right?
“Within the Euro area, some countries have very overvalued exchange rates and they’re the ones really suffering and some have undervalued rates such as Germany and they’ve benefitted from a large export boom which is now slowing down as the rest of the world is not growing as quickly as it was. They pursued a strategy of joining the currency union and they benefitted from having an undervalued exchange rate in Germany. We are moving to a properly valued exchange rate. I think we’re probably there. We’re gradually shifting now from domestic spending to export spending and the good news is, there are parts of the world which do demand exports from the UK but the bad news is both the direct demand for exports and the enormous uncertainty generated by what’s happening in the Euro area is encouraging firms to hold back on investment.”
The fall in the pound - are you happy to see the fall?
“The markets determine the level of exchange rate, not us. The fall in the exchange rate earlier this year offset the rise in the exchange rate in the previous year. Basically we’re at the same level we were after the impact of the financial crisis. The markets judged then that was the right level for the UK looking ahead and they seem to judge that now. We just have to accept that and adjust and without the fall in the exchange rate that did occur from before the crisis to now, our export industry would not be growing as they are and unemployment would be a good deal higher.”
It could continue to fall. At which level would you want to step in?
“It’s not falling further at present. It is broadly stable I think. I don’t know where it will go in the future. The markets will decide and we’ll set our monetary policy accordingly. We’re certainly not looking to push Sterling down. We’re looking to ensure recovery in the UK economy and gradually bring inflation back to our 2% target.”
Are you worried seeing the pound so weak?
“The current level of Sterling is part of the adjustment to a new rebalanced UK economy. There’s no point pretending we can go back to the pattern of demand we saw in 2006/2007. We need a big shift of resources towards exports, towards manufacturing and biz investment. The consequence of that is we have to accept that private consumption and public spending will not grow as rapidly. We’re making good progress towards that re-balancing and I think the companies I met today demonstrated that. They have benefitted enormously and they are generating export income for this country.”
What about getting back to the path we were on before the crisis…
“We will get back to the level of unemployment and the path of output, we won’t get back to the pattern in which we had a big trade deficit, consumption was high and exports were relatively weak. That balance has to be changed. Policies are in place to achieve it. We are on track to achieve it. Recovery is in sight.”
What about inflation? There have been signals that we should be getting used to higher inflation for longer. Spending power squeezed?
“No, what we said was if there are specific factors which push up inflation and have nothing to do with the state of the economy, we wouldn’t unnecessarily raise interest rates, raise unemployment as a result, merely to deal, for example, with a rise in student tuition fees. It’s those factors which relate to administered prices, nothing to do with the state of the economy, that we’re prepared to look through for a relatively short period. We’re determined to being inflation back to the target and I’m quite confident that over the next two or three years the monetary policy committee will pursue the policies needed to achieve just that.”
Budget. Is there scope to do anything significant to boost economy?
“The Chancellor doesn’t tell me whether we have scope to ease monetary policy and I’m certainly not going to tell the Chancellor…”
He has said he’d like the Bank to do more…
“What he said was, the strategy was based on a gradual shift back to reducing the budget deficit and as a consequence, the BOE will have the responsibility for trying to support the recovery. That’s the strategy, I totally agree with it. The precise measures that are taken, by the bank are a matter for the bank, the Budget entirely a matter for the Chancellor.”
Any advice for him on which levers to pull?
“We certainly had a conversation about the economy and the various things which could be done. Of course, that’s what out meetings are all about.”
Supply side measures - what did you have in mind?
“I explained in the past, the reason why the bank has suggested that supply side reforms would be particularly beneficial at this juncture are that the reason why we can’t go back to the old imbalance in the economy is that people realise now that the level of domestic spending will be on a lower path than before. One way of offsetting that would be to introduce supply side reforms. The reason for doing it is that if we are successful in improving the supply side of the economy then people will anticipate that their incomes will be higher in the future and that will give more incentives to businesses to invest today because they will know demand will be there in the future and may well encourage more people to spend today. That’s the strategy behind it. As for the particular measures, that has to be a matter for the government, not the central bank.”
Are you passing the buck?
“No. I’ve had conversations with the Chancellor and the PM about the strategy. We talked privately about the various things that could be done. It’s not my job and would be quite wrong for me to speak in public about things which are their responsibility. I’m confident there are things the UK can do and I’m very confident the government understands that.”
You called for RBS to be split up - speedier resolution to RBS?
“I think the supply side reforms go very much wider than that. I talked of the need to rebalance the UK economy. We have to depend on exports to a greater extent than we did. We’re a trading nation. One of the things that has been difficult in the past decade has been the failure of the Doha round of trade negotiations. There is a real opportunity for this country to take the lead in pushing ahead with the new trade relationships between Europe and the US and Europe and Asia. The UK can play a very important role in those negotiations and I hope we will.”
People will want to know when will the bad news end?
“It would be silly of me to pretend that I have a crystal ball that can tell me exactly when things will change. I can’t do that. All I can say is that with reasonable judgement based on where we are today is that recovery is in sight. If you take away what happened in the North Sea oil production and in construction, the UK economy even last year grew by 1.5%. There is momentum behind the recovery that’s coming. And I think that during the course of 2013 we will see the recovering come into sight. When…I can’t possibly tell you and it would be silly of me to pretend that I could.”
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