Financial Regulatory Forum

TEXT-BoE Governor Mervyn King opening statement to House of Commons Committee

September 15, 2009

BRITAIN/    LONDON, Sept 15 (Reuters) – Below is a full text of Bank of England Governor Mervyn King’s opening statement to parliament’s Treasury Committee.
     
   TREASURY COMMITTEE OPENING STATEMENT TUESDAY 15 SEPTEMBER 2009 MERVYN KING, GOVERNOR OF THE BANK OF ENGLAND 
   
   “Mr. Chairman, following a precipitate fall in economic activity at the end of last year and the start of this, there are now signs that growth has resumed in the third quarter. Inflation over the next year is likely to be volatile. But looking further ahead, the strength and sustainability of the recovery is highly uncertain and the balance of risks to inflation around the 2% target remains on the downside.
   
   Money spending fell by over 4% in the year to 2009 Q2 and real activity fell by 5 ‘/2%. Most of our major trading partners have experienced similar falls in demand. But both at home and abroad, there are now signs that activity is picking up. The key question facing the Monetary Policy Committee is whether this recovery will prove to be sufficiently strong and sustained to keep inflation on track to meet our 2% target.
 
   The consequences of the financial crisis, sparked by the failure of Lehman Brothers exactly a year ago today, will be pervasive and long-lasting. That is not to say that growth cannot resume. In some countries it already has, and in others it will. But there is a long hard road ahead to restructure our financial sector. Over a number of years, banks will be required to hold much larger and more effective buffers of capital and liquid assets to make the financial system less susceptible to the sort of panic that occurred last year. Following a meeting of central bank governors and heads of supervision in Basel last week, a clear direction for the future of capital, leverage and liquidity requirements was announced. At present, though, most financial institutions around the world are focussed on recuperation, giving them a powerful incentive to be cautious about extending new credit to households and businesses. That is acting as a direct drag on demand. But the crisis has also caused households and companies around the world to want to strengthen their own financial positions and that has acted as a further brake on spending. 
 
    Those factors will be important influences on the UK economy for the foreseeable future. Nevertheless, the decline in activity has moderated and growth seems set to resume. That is due to the combined effect of three factors that are supporting a recovery: a slowing in the pace of de-stocking, the lower level of sterling, and the extraordinary monetary policy actions of the past year which have acted to increase the supply of money by cutting Bank Rate to 0.5% and purchasing both public and private assets. To date the Bank has purchased £147 billion of assets. Six months after launching the programme we are beginning to see its impact on the supply of broad money and nominal spending. 
 
    Despite the more positive recent indicators, the falls in output that have occurred over the past year have opened up a significant margin of spare capacity in the economy. That spare capacity is bearing down on inflationary pressure. Over the next six months, inflation is likely to be volatile, initially falling further below the 2% target from its present level of 1.6%, before rising above the target. That volatility reflects base effects as well as the reversal of last year’s VAT cut. In the medium term, the margin of spare capacity means that the risk is that inflation will be below the 2% target. It was for that reason that, at its August meeting, the MPC chose to inject further monetary stimulus into the economy. In just the same way, it will be the outlook for inflation that will guide when and how quickly the MPC raises Bank Rate back towards more normal levels, and when and by how much the assets purchased since March are sold. Chairman, I am grateful for the opportunity to make these remarks. I and other members of the MPC here today stand ready to answer your questions.”
   ((UK Economics Desk; Tel. +44 207 542 2774))
 Keywords: BRITAIN BANK/ 
  
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 Tuesday, 15 September 2009 09:53:35RTRS [nLF378963] {EN}ENDS

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