Governor in warning on mixing policy

Group Business Editor

Wednesday 24 October 2012

BANK of England Governor Sir Mervyn King last night warned it would be dangerous to mix monetary and fiscal policy as he admitted that UK economic output had been "much weaker than expected".

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IAN McCONNELL BUSINESS EDITOR

He voiced readiness to inject more money into the economy, if required, in a speech to South Wales Chamber of Commerce in Cardiff, ahead of official figures tomorrow that are expected to show gross domestic product grew in the three months to September after three consecutive quarters of decline.

Sir Mervyn said that, despite a "probable rise in output" in the third quarter, the big picture was that GDP was "barely higher" than two years ago and 15% below where steady growth since 2007 would have taken it. He warned people might have to live under the shadow of the "huge" global economic adjustment which was required "for a long time to come".Speaking out against any so-called "helicopter money" approach, such as giving money directly to households or the UK Government or cancelling the gilts which the Bank has purchased in the process of injecting £375 billion into the economy through its "quantitative easing" programme, he said: "Not only is combining monetary and fiscal policies unnecessary, it is also dangerous."Some commentators have speculated Lord Turner, who chairs the Financial Services Authority and is viewed as a possible successor to Sir Mervyn, might favour the Bank telling the Treasury it never has to repay some of the Government debt bought through QE. This speculation came after Lord Turner this month cited a need to be ready, if existing measures proved insufficient, "to consider further policy innovations, and further integration of different aspects of policy – to overcome ...economic headwinds".Sir Mervyn insisted gilts bought through QE must eventually be sold by the Bank to withdraw money from the economy and avoid the risk of losing control of monetary conditions. He said: "It is peculiar, to say the least, that some of the same people who believe the Governor of the Bank is too powerful also believe that he should stand on the steps of Threadneedle Street distributing £50 notes – a policy that you will appreciate is rather hard to reverse. "For the same reason, the Bank could not countenance any suggestion that we cancel our holdings of gilts. The Bank must have the ability to reverse its policy – to sell gilts and withdraw money from the economy – when it becomes necessary."Some, including Saga director-general Ros Altmann, have expressed fears about the impact on pensions, pension funds and annuities of QE, which is aimed at stimulating economic activity and involves the issuance of central bank reserves to buy Government and corporate debt. QE was introduced in spring 2009, after UK base rates were cut to a record low of 0.5%.Sir Mervyn said: "Giving money either to the Government or to households directly, or indeed cancelling our holding of gilts, means that the Bank of England has no assets to sell when the time comes to tighten monetary policy. And when Bank Rate eventually starts to return to a more normal level, as one day it will, the Bank would then have no income, in the form of coupon payments on gilts, to cover the payments of interest on reserves at the Bank of England that we had created."The Bank would become insolvent unless it created even more money to finance those interest payments, and that would lead ultimately to uncontrolled inflation. That is a road down which the Bank will not go, and does not need to go. I suspect advocates of 'helicopter money' and related ideas are really talking about a relaxation of fiscal policy. It would be better to be open about that."Although seeing "encouraging signs" in falling unemployment, lower inflation, and retail sales figures "consistent with a pick-up in consumer spending", Sir Mervyn said: "The recovery and rebalancing of the UK economy are proceeding at a slow and uncertain pace. At this stage, it is difficult to know whether some of the recent more positive signs will persist. "The Monetary Policy Committee will think hard before it decides whether or not to make further asset purchases. But should those signs fade, the MPC does stand ready to inject more money into the economy."

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Governor in warning on mixing policy

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