Mervyn King hints at chance of more QE

Feb 24 2010 by Iain Laing, The Journal

BANK of England Governor Mervyn King has kept the door ajar for further money supply-boosting measures after warning that the UK's economic recovery was still in the balance.

In a gloomy update to MPs, Mr King warned that risks to expectations for the UK economy were “to the downside” and said the Bank could increase its £200bn quantitative easing (QE) programme if the recovery was to falter. He told the Treasury select committee that world demand remained fragile, while the eurozone recovery appears to have stalled, threatening UK exports.

The pound fell in the wake of the meeting, down 0.3% against the euro and 0.5% against the US dollar at one point. This left £1 worth 1.13 and US$1.54.

The Governor said it would be a big help to the economy if the eurozone economies could return to growth more strongly, but growth is currently seen as sluggish by fellow policymaker Charlie Bean. In the committee’s last inflation report meeting before the general election, Mr King said: “The crisis has left us facing many serious challenges.

“Among them are how to reform the international financial system, how to reduce our largest peace-time fiscal deficit, and how to restructure our banking and financial system to prevent another, more serious, crisis in future.”

Mr King said while the crisis did not originate in the non-financial sectors of society, “that is where most of the costs are falling”.

Banks continue to focus on rebuilding their balance sheets and lending to the non-financial sector remains in decline.

He said it was “not a position we are comfortable with”, but there was still quite a way to go before the issue is resolved.

Mr King suggested the MPC could extend the QE programme if the economy looked in danger of slipping back into decline.