LONDON (MNI) – The following is a transcript of the fourth part of
the press conference following the publication of the May Bank of
England Inflation Report. Questions are paraphrased and shortened.
Q7: Are there any potential benefits for Britain of countries
dropping out of the euro zone?
King: “I think the real economic issue is about how the differences
in competitiveness are resolved, how the external deficits are brought
down and how the imbalances are unwound that really is the essence of
it. I don’t want to speculate on whether one method of restoring
competitiveness of countries in the south is better than others, either
for them or indeed for us. I think that draws me far too close to being
seen to advise them as to what they should do and I don’t want to do
that.”
“What I do want to do is to suggest that when we think about it it
is not sensible to think about it solely in terms of euro stays together
excellent, euro comes apart disaster. Whatever happens, there are major
problems ahead, there are credit losses to be realised and however they
choose a solution here it is going to be a very difficult path to go
through because countries like Germany and the Netherlands have yet to
face up to their rebalancing which will be required aswell as the
rebalancing of countries in the south.”
“So whatever happens there will be difficulties ahead that
undoubtably effect us and that’s a problem that we’ve got to navigate
through. They will have to choose the method that they think best for
finding a way to resolve those problems of external deficits and
competitiveness. But your underlying point which is that the issue
should not be thought of simply as if the project stays together that
means it’s good news for everyone and if it doesn’t that’s bad news for
everyone is too simple.”
“Methods have to be found now for tackling the underlying
competitiveness, external financing imbalances and indeed solvency
problem. You’ll understand why I’m very reluctant to use a form of words
that could be missrepresented as my advocating a solution to this.”
Q8: At what point do you get worried about the rise of sterling?
King: “I don’t think central bank governors can ever expect the
exchange rate to move exactly as they would wish and I think the
developments in recent weeks have not been entirely unexpected given
what’s happening in the euro area. We have to accept that and feed it in
to our judgement as to what we should do for our own policy.”
“But there is no doubt that the big depreciation, the 25%, is still
intact, broadly speaking, and that is a vital part of the rebalancing,
that is an absolutely essential part and that’s why I’ve always said
that the approach to policy is very important and which very few people
dissent from is a mixture of loose monetary policy with low interest
rates, asset purchases and a large depreciation of sterling and on the
other hand a gradual tightening of fiscal policy to get back to a much
lower structural deficit over the medium term and that raw balance of
policy is the right approach and it is the one that we are persuing and
few other countries in the world have actually got round to doing it.”
Q9: Question on the effect that additional bank holiday will have
on GDP in Q2.
BOE Chief Economist Spencer Dale: “There are a number of special
factors which are likely to effect the quarterly pattern of growth over
the next few quarters the particular one is the Diamond Jubilee where
the late May bank holiday is shifted into June plus there’s an extra
bank holiday as well in June. That will have the effect that output
recorded in June and in Q2 as a whole will be less than it otherwise
would have been if those celebrations were not happening.”
“We saw similiar types of effects with the Royal Wedding last year
and our best guess was the impact of that Royal Wedding reduced growth
in the second quarter by around 0.4 percentage points or so and our best
guess is that if anything the Jubilee effects will have a slightly
bigger effect on quarterly growth in part because it is happening that
much later in the quarter.
“It is happening in June rather than April and so the ability for
companies to make up that output within that quarter is that much less.
When we observe output growth in Q2 I think the way to think about it is
that underlying quarterly output growth would have been 0.5 percentage
points stronger than that headline measure will show.”
“We will then see that in the Q3 data when we go back to normal we
will see a bounceback in growth. The other factor that is likely to
effect quarterly growth is the Olympics. Trying to work out exactly how
the Olympics will effect output growth is very difficult. Our best guess
is it is likely to boost growth somewhat in the third quarter. Our best
guess is that underlying output growth will be half a percentage point
stronger than the headline measure in Q2. In Q3 the combination of the
bounceback from the jubilee and the olympics means you could see growth
being exaggerated by slightly more than half a percentage point and then
you get back to sort of a weakening in Q4 as you get back from the
Olympics effect.”
Q10 Is there scope to slow fiscal tightening?
King: “Our task is monetary policy. We set interest rates and the
program of asset purchases and as I said looking two years ahead our
judgement last week was that the risks around the target were evenly
balanced so I think it was a perfectly reasonable decision to do no
more.”
“I think you need to bear in mind that the asset purchases that we
made between October and last month will continue to stimulate the
economy for some time to come. The fact that we’re not continuing the
program at this stage doesn’t mean to say that the effect doesn’t
continue to pass through the economy, it does, and the option is always
open to resume the program we haven’t made any decisions to stop it and
do no more, this is a decision that we can review every single month. We
have our task which is to look at the balance of risk to inflation and
that’s what we’ve done.”
-London newsroom: 4420 7862 7491 e-mail: drobinson@marketnews.com
wwilkes@marketnews.com
[TOPICS: M$$BE$]