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Posen Says BOE Officials Discussed Buying Non-Gilt Assets

Bank of England Governor Mervyn King said the European Central Bank’s three-year loans have prevented a bank run in the region, though in the U.K. further liquidity action isn’t necessary.

King was asked by lawmakers today in London whether the U.K. central bank should mimic the ECB’s operation to support the British financial system. Euro-area banks tapped the ECB for a record amount of cash today in its second long-term refinancing operation. It will lend 800 financial institutions 529.5 billion euros ($712.2 billion), more than economists had forecast.

“The prospect of a bank run in the euro area has been removed by the activity of the ECB,” King said at a Parliament hearing. In the U.K., the central bank “injected a vast amount of liquidity, so the one thing which the British banking system is not short of, is liquidity. If anything, it needs more capital in order to persuade the private sector to lend to it.”

His comments were echoed by Deputy Governor Paul Tucker, who said loose monetary policy by central banks around the world prevented “ruination,” and without it “this economy would have been destroyed.” The bank expanded its bond-purchase program by 50 billion pounds ($79 billion) to 325 billion pounds this month and held the key interest rate at a record low amid risks from Europe’s sovereign debt crisis.

Credit Ratings

King said the U.K. government’s fiscal plan is helping to maintain investor confidence even after Moody’s Investors Service cut its outlook on Britain’s Aaa credit rating to negative.

“I don’t think we should be slaves to the rating agencies, but nevertheless what they said was a reminder” of risks from the deficit, he said. “This is not something we can be complacent about just because the yields today are low. They are low because there’s a credible plan in place that people believe in, and it’s the belief in that plan that actually matters.”

U.K. bonds were little changed today, leaving the 10-year gilt yield at 2.102 percent as of 12:42 p.m. in London. It fell to 1.917 percent on Jan. 18, the lowest since Bloomberg began compiling the data in 1989.

Policy maker Adam Posen, who also attended the hearing, said the central bank’s latest round of so-called quantitative easing will be as effective as its previous round that began in March 2009. King said any further expansion of policy will depend on how the economy performs.

“By and large, I don’t think there’s any hard and fast expectation that we’re inevitably going to do more,” King said. “What really matters is what we think is the appropriate action to take to keep inflation on track to meet the target in the medium term, so we will take whatever action we think appropriate.”

Economic Outlook

Bank of England Deputy Governor Charles Bean said there has been an improvement in some U.K. and global economic indicators in the past couple of months from lows seen in October.

“There have been a few positive signs, but I think it’s important not to read too much into one or two indicators rising to the upside,” he said. “It’ll take a lot more swallows to make a summer.”

King objected to a suggestion from lawmaker Andy Love that he was “relaxed” about reviving lending to small- and medium-sized companies, and said the government hasn’t been strong enough in dealing with banks.

“In terms of small and medium-sized enterprises and bank lending, I’ve consistently and publicly been dissatisfied with what’s been done” by the government, including the previous administration, he said. “I’m not relaxed about it at all, I’m the person that’s put forward proposals for how this might be done, and they’re not proposals that the banks find favor.”

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