LONDON, Feb 29 (Reuters) – Following are comments
by Bank of England Governor Mervyn King, deputy governors Charles Bean and Paul Tucker and external Monetary Policy Committee member Adam Posen in hearing with parliament’s Treasury Committee on Wednesday.
For Bean’s, Tucker’s and Posen’s annual reports click: http://www.bankofengland.co.uk/
POSEN ON UNEMPLOYMENT/SUPPLY
“If we think the output gap exists and is not trivial, which I think there is good reason tobelieve…Then any lackadaisical attitude we take to trying to bring demand back to where it should be, carries the risk you just identified, eroding supply capacity.
“We want to be in a position where we’re going to have to some day raiserates because inflation’s coming back but we want to come because the gap has been closed by demand not by supply shrinkage.”
“The scale and pace of this erosion actually though is slower and smaller than I would have worried about.
“Inparticular, given how well our labour market functions, as bad as youth unemployment is right now, there are reasons to be concerned about that, we are not adding to long-term unemployment at what I, and a lot of people, would consider the structurally unemployed, as quickly as say we were in the 1990s. It looks more like the 1980s – the trade off is not that steep.
“I’m not worried about the supply capacity eroding the output gap quickly.”
BEAN: DON’T READ TOO MUCHINTO SIGNS OF IMPROVEMENT
“Quite a few of the business surveys, particularly the CIPS indices have strengthened in the past couple of months. That’s true around the world it should be said, so it looks like a global phenomenon and there’s beensome recovery from troughs seen around October time. Retail sales were stronger than people expected. So there are a few positive signs, but it’s important not to read too much into one or two indicators surprising to the upside. It will take a lotmore swallows to make a summer, if you like.”
“The generic point is that the rebalancing of the economy is underway. The substantial depreciation (of sterling) is a necessary ingredient for net exports to take up the role of demand. It camethrough a bit more slowly than we expected, but there’s now evidence that the competitiveness gain is working as we expected.”
KING: IMPACT OF EURO AREA WEAKNESS ON UK
“Two percent off export growth is about half a percentage point off GDP growth.
“So, a weak euro area, really weak, basically no growth at all, might knock half a percentage point off growth in the UK, relative to a situation in which everyone was growing at their normal long-term level.”
KING: CONDITIONS IN PLACE FOR REBALANCING
“Whereas two years ago 10-year government bond yields in Britain and Italy were identical, theirs have gone north towards 5.5-6 percent and ours have fallen to between 4 to 2 percent and that will help, otherthings being equal, long-term investment. So preconditions are in place and I think, if there was one word that I think we need to hang onto to drive policy in the next three or four years, it’s patience. We’ve done the things that arenecessary…we’ll adjust asset purchases in either direction.”
MERVYN KING ON FISCAL STABILISERS
“What I have suggested before, is that people underestimate I think the size of the automatic stabilisers in the UK. That is the extentto which fiscal policy is automatically loose if the economy is weaker than expected.
“These automatic stabilisers are very significant and removes in the UK relative to the United States the need to consider discretionary fiscal policy changes.
“And on top of that monetary policy is the normal vehicle for handling quarter-to-quarter or even year-to-year changes in the path of the economy relative to what was expected.
“So I think if you combine monetary policy and the automatic stabilisers that’s a pretty powerful lesson to deal with unexpected movements in growth.”
KING ON MOODY’S NEGATIVE OUTLOOK ON UK DEBT
“That announcement by Moody’s actually had no effect on the yield on (UK) government bonds. Theimportant thing is that we keep the medium-term plan on track.”
“The action they took had no impact on the yield.”
“What matters is the view of people in the market, not the view of the ratings agencies. I don’t think we should be slaves to the ratings agencies, but what they said was a reminder that the ratio of debt to GDP is rising.
“It’s not something we can be complacement about. Yields are low because there’s a credible plan in place that people believe in.”
BEAN ON HOUSEHOLD SPENDING
“I am reasonably confident that, barring any unforeseen adverse shocks during the course of this year, we should see household spending growth picking up as we go through into the second half of this year.”
TUCKER: MPC MADE ERROR IN NOT SPOTTING EURO ZONE, U.S RISKS
“The headwinds from Europe, the slowdown in the States in the autumn were much greater than we expected and that affects our economy, and these external influences have arrested the recovery of our economy and we didn’t foresee that. It was an error.”
TUCKER ON INFLATION STAYING ABOVE TARGET
“If inflation now sticks at 3.5 percent without a further cost push from the global economy, you will be rightly asking what on earth we were doing, given the clarity of our mandate.
“This has been a big call and it was one where we put the interests of medium-term inflation and by doing so have been able to support demand and jobs in the economy.”
POSEN ON SUDDEN SHIFT ON MPC TOWARDS QE
“The one thing that the MPC came to the decisions it did and then voted unanimously for more QE in October last year disturbed me…We went from an 8-1 vote against to 9-0 for, not because the committeesuddenly decided the world was ending. I don’t know what the differences in the process should be but it seems to me…Maybe the committee would have gone from 1-8 to 2-7 to 3-6 to 4-5.I do not know why it didn’t turn out that way.
“The secondquestion which my colleagues and I have discussed in MPC meetings is that there is some sentiment amongst some members of the committee that even if the kind of forecast I and others were talking about was right, you might not want to do some furtheQE while the inflation rate was above target. I can understand that from an emotional level, but I think it’s wrong.”
POSEN ON LENDING BY STATE-BACKED BANKS
“The government has to make a choice. For the time being, because ofevents in the euro area and other developments, we are so far away from the initial purchase price of these assets that it is not an imminent choice which means it is that much easier, I would hope, for the government to decide to consider the kindsof direction that Governor King was just speaking about.”
KING ON ECB’S LTRO
“The idea that the long term repo operations have eased the supply of finance to small businesses in the euro area is a myth.
“What it has done is toprovide a source of funding to banks particularly in the southern member countries of the euro area which were experiencing a bank run, enabling them to fund the withdrawal of funds.
KING ON LENDING TO SMALL BUSINESSES
“How do we try to give some encouragement to the banks to lend to small businesses? It’s either direction in terms of the banks that the taxpayer owns or it is an incentive to do something which the banks wouldn’t otherwise do, in other words a subsidy.”
ADAM POSEN ON LENDING TO SMES
“I think I have done more than almost any other economic official in British public life in the last six months to draw attention to this issue. But I hesitate to use the word crisis because when I think crisisthat word’s gotten cheapened.
“There is a structural misfunctioning of capital markets and lenders inthe UK, that there is insufficient lending to small and medium enterprises on the right basis.
“The financial crisis that preceded the nationalisation of our banks, the concentration of our banking system and the natural stresses that go with arecession have made this even worse now, but it is a fundamental structural issue.”
KING ON NERVOUS MARKETS
“Now markets are genuinely very nervous. They are nervous because they don’t actually have any great experience in which tocalibrate how much capital banks need to have to be safe enough to take the risk of lending.”
POSEN ON ECB-STYLE REFINANCING OPERATION
“We have been watching the LTROs with great interest…I would expect that the (monetary policy)committee if necessary would review it. We are thankfully not in an overt crisis and I and I believe every other member of the committee…believe that quantitative easing on gilts is having the desired effect on the British economy.”
KING ON M4/QE
“The amount of broad money in the economy was hardly growing at all. The main purpose of our (asset) purchases was to make sure that process didn’t lead to a point where money actually would fall as it did in the Great Depression,but to ensure that we get the growth rates in broad money back up to normal levels.
“That I think is broadly why we see a correlation that the more banks deleverage the more they’re pushing down the growth rates of money and the more work weneed to do by way of asset purchases in order to offset that.”
POSEN: MPC DISCUSSED BUYING ASSETS OTHER THAN GILTS
“We’ve had group discussions of this outside the formal meetings. The Committee meets formally and informally. “There have been both formal and informal disucssions of the possibility of buying other things than gilts. When I joined the MPC in September 2009, there was a series of discussions of that and it was raised again when Martin Weale joined thecommittee.
“But the Bank’s statutes are set by the Bank’s executive. We can have any discussion we like, but it would be the Bank’s executive to take the decision for us to buy anything else.”
ADAM POSEN ON DEFICIT REDUCTION RISK TOGROWTH
“In my opinion the three things that when I speak to investors, not my opinion, my recollection of when I speak to major investors in sterling denominated markets, they’re are worried about three things.
“They’re worried about thegeneral issue that in Europe, including the UK, austerity can feed back on itself and if overdone can become self-defeating in terms of meeting your targets for budget reduction.
“I’m not saying that is my view, I’m reporting that’s what theinvestors say.”
KING ON EXPECTATIONS OF QE
“It’s true when we finish this (round of QE) we’ll have about 30 percent of the market, but the government is issuing gilts all the time. It’s much more likely we’ll be falling back fromthat 30 percent than increasing. I don’t think it’s obvious there’s an arbitrary limit on that at all. The impact of the decision you made depends on whether it’s bigger or smaller than the market expected.
“By and large, I don’t think there’sany hard and fast expectation that we’re inevitably going to do much more (QE). What matters is what we thikn . We will take whatever action we think is appropriate and at that point, expectations will adjust.”
POSEN ON RESTARTING QE
“I remain frustrated with myself that, if the committee in a sense agreed in September or October of last year that more policy ease was warranted – to me the arguments may have been quite debatable a year ago, in January, February 2011, but by thesummer (of 2011) I would like to have thought the arguments were pretty clear. So a sense of frustration that I was unable to be persuasive.”
POSEN ON SOVEREIGN RATINGS
“Speaking for myself, I have never given sovereign ratings that much concern, and in a world where potentally the only triple-A sovereigns left will be countries with populations of under 10 billion, I would not few it as a problem. I few our credibility as important, but I do not view sovereign ratings as the be all and end all of our credibility with investors.”
TUCKER (IN ANNUARL REPORT) ON UNCERTAIN OUTLOOK
“The outlook remains highly uncertain. On the one hand, there are in my view upside risks to the February Inflation Report’scentral projection from a more rapid pickup in wages if some people leave the labour force, from the possibility of disruption to oil supply in Nigeria and Iran, and from a rebuilding of profit margins once recovery appears more secure.”
TUCKER ON BANK FUNDING COSTS
“Notwithstanding progress over recent months, the tangible possibility of calamity in the euro area increases bank funding costs, even though UK banks have gone some way to strengthening their balance sheets.”
(Reporting by UK bureau)
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