Bank of England Governor Mervyn King said his vote for more stimulus this month reflected his worries about a deteriorating global economic outlook at a time when he’s pessimistic that Europe’s debt crisis can be resolved.
“What’s concerned me in the last several months, and why I voted for easing in policy, is the worsening in the position in Asia and other emerging markets,” King told lawmakers in London today. Another reason is that “my colleagues in the U.S. are more concerned than they were at the beginning of the year about what’s happening in the American economy. It’s not a comfortable position,” he said.
King was defeated at this month’s policy meeting in a push to expand the bank’s bond-purchase program by 50 billion pounds ($78 billion) to 375 billion pounds, with a majority on the panel preferring no change. In the last six weeks, investor concern grew that a Greek election result may lead to its expulsion from the euro, while Spain asked for a bailout.
“I’m very struck by how much has changed” since the bank published forecasts on May 16, King said. “I am pessimistic, and I am particularly concerned because for two years now we’ve seen the situation in the euro area get worse, the problems have been pushed down the road.”
European leaders will this week hold their 19th summit to address the region’s sovereign debt crisis since it started in early 2010. Four officials led by European Union President Herman Van Rompuy today released a road map to a fiscal and banking union that ran into immediate criticism from Germany for placing too little emphasis on controlling national budgets.
The turmoil in Europe has been compounded by signs of slowing growth in the U.S. and in Asia. Federal Reserve policy makers last week cut their growth forecasts for the world’s largest economy. Chinese manufacturing may have shrunk for an eighth month in June, according to a June 21 report.
King, who retires in a year, said the Bank of England can respond by adding to its gilt purchases and that there is “no immediate limit or restraint on that.” HSBC Holdings Plc and Royal Bank of Scotland Group Plc are among banks forecasting an expansion of the Bank of England’s bond program next month.
The central bank’s chief economist, Spencer Dale, said he’d favor measures to increase credit. King announced a program with the U.K. Treasury earlier this month to boost lending. He said today there must be discussions with the European Commission on the plan before publishing details.
“Were the economy to require additional stimulus, I would like to explore the possibility that some of that support be provided by measures designed to improve the flow of bank credit,” Dale said in his annual report, published today. This “has the potential to bolster the supply side of the economy as well as demand.”
Policy maker David Miles, who voted with King to expand QE this month, said he would favor that over cutting the benchmark interest rate as the latter’s possible impact was “ambiguous.”
“It wasn’t clear that it would do what we wanted it to,” he said. “In contrast, quantitative easing, the direction that would push the economy in is less ambiguous. I remain of the view that buying more assets would ease conditions.”
King told the cross-party panel of lawmakers that the world economy still has some way to go before it is through the global financial crisis that began in 2007.
“If you asked any of us in the bank, I don’t think any of us would have thought we would still be right in the thick of it five years later,” he said. “I don’t think we’re yet halfway through it.”
King also said that no country can expect to escape the crisis by itself and that it will take a “great deal of international cooperation.”
“It’s very striking our colleagues in the U.S. spend so much time worrying about developments in the euro area,” he said. “They realize that given the interconnectedness, both through trade but also through banking, that no one country, even one as important as the U.S., can make itself immune from trouble if there is a real difficultly in Europe.”