Bank of England Governor Mervyn King said there may be a “considerable” way to go before U.K. interest rates return to “normal” as policy makers debate when to start withdrawing emergency stimulus from the economy.
“There will come a point when we will certainly need to ease off the accelerator and return Bank Rate to more normal levels,” King told lawmakers in London today. “I look forward to that time because it will probably be a signal that there is a smoother drive ahead, with the economic outlook improving in a durable way. But I fear there is some considerable distance to travel before we can begin to use the word ‘normal.’”
Bank of England policy makers are starting to split on monetary policy as an economic recovery stokes concerns about inflation pressures. While Andrew Sentance argues it’s time to raise the benchmark rate from a record low of 0.5 percent, David Miles told the same committee that the central bank should be prepared to step up its bond-purchase program to safeguard growth if necessary.
“Recent events in sovereign debt markets and in bank funding highlight the downside risks,” said Miles in written testimony to lawmakers today. “Further asset purchases may be warranted at some point in the future.”
The central bank bought 200 billion pounds ($311 billion) of government bonds to pump money through markets during the financial crisis.
Bank of England markets director Paul Fisher said at the same hearing that slack in the economy will keep a lid on prices. Inflation, which has exceeded the government’s 3 percent upper limit since February, slowed less than economists expected last month. Prices rose 3.2 percent on the year, compared with 3.4 percent in May.
The pound traded at $1.5585 at 11:08 a.m. in London, little changed from its level at the start of the testimony. The Monetary Policy Committee next votes on rates on Aug. 5. The appointment of Martin Weale will take the MPC back up to its full complement of nine members.
King said policy makers should be wary of recovery signs even after the statistics office said July 23 that the economy expanded 1.1 percent in the second quarter, the most in four years.
“We must be careful not to read too much into one number,” King said. “And the wider economic problems around the world underline the fact that we cannot be confident that the recovery in demand, output and employment here in the U.K. will be sustained.”
The National Institute of Economic and Social Research said in a report today that the GDP report was a “blip” and may not be sustained for the remainder of the year as the government implements the deepest budget squeeze since World War II to reduce the deficit.
Policy makers face a “difficult challenge” in balancing risks to growth and inflation, King said. “To do so, we judge that at present it is right to keep our foot firmly on the accelerator in order to stimulate the economy.”