LONDON (MNI) – The following is a transcript of the fifth part of
the press conference following the publication of the May Bank of
England Inflation Report. Questions are paraphrased and shortened.
Q11: Are we going to see another squeeze on households this year?
Should you have hiked rates back in 2005?
King: “The question of what we might have done prior to 2007 we can
come back to on another occassion. Different members of the committee
voted for different paths for interest rates during that period. I think
you mentioned two or three of the factors, yes there will be a squeeze
on real take home pay this year than we had previously expected.”
“We do know that energy prices and other indirect taxes will be
higher than we had thought. We do know that the funding costs of banks
have risen and that they have been passed through in mortgage rates and
that some households will see that as an additional cost and we do know
that average earnings is rising at a lower rate than we might have
expected, that’s been really quite surprising but welcome in terms of
containing domestic cost inflation, that will continue for perhaps for a
bit longer and that’s the reason why our inflation projections published
today are a little higher in the near-term than last time and growth is
a little lower.”
“The big picture remains one of a gradual recovery and inflation
falling back to the target and that’s the big message I want to get
across to you.”
Q12: Is 2012 going to be another bad year for households?
King: I don’t think it’s going to be as bad. Inflation was 5.2% in
September, we said that it would fall back, it has fallen back and it
has further to go. We think that as we get into next year it will come
back towards target. So there are a great deal of uncertainties this is
clearly effecting spending and demand but the squeeze on take home pay
is continuing a little longer than expected for the specific reasons
that I have just mentioned.
Q13: What options do you have to support growth and the recovery?
King: “Our options are fairly constrained. We have monetary policy,
that’s the tool that we have. Clearly the Financial Policy Committee can
try to improve the resilience of the banking system in the light of the
storms heading our way but the real question is how much monetary
stimulus we inject into the economy.”
“What’s quite important is that people don’t run away with the
thought that because there uncertainties and because unexpected things
happen therefore we should abandon the view that the major instruments
of macroeconomic policy can work, they can work, and the MPC will have
to make a judgement month by month as to whether it does or it does not
want to inject more monetary stimulus.”
Q14: Why should people trust you that inflation is going to come
down?
King: “We’ve never said what would happen to inflation, we’ve
always talked about the balance of risks and we’ve talked about the
fact that we thought it was very likely that inflation would come
down.”
“When we met here six months ago inflation was 5.2% and it has come
down very close to the number that we thought it would do. What’s
happened since is that we’ve had very specific news about gas prices in
the autumn, we had some news in the budget which leads us to feel that
inflation is likely to be higher over the remaining part of this year
than we thought.”
“But it’s still the case that even if those gas price increases
take place that you should expect to see some further fall in inflation
at the end of the year as the large increases in domestic energy prices
that took place at the end of last year drop out of the twelve-month
comparison so I still expect that to happen and I think we still expect
that given the amount of spare capacity in the economy which you can see
in the unemployment rate that this will gradually bare down on inflation
and that inflation will fall back and we see very contained domestic
cost inflation which is the main argument for thinking that actually
inflation will come back.”
Q15: Does fiscal consolidation have dampening effect on demand?
“Of course the fiscal consolidation has a dampening effect on
demand, that’s clear and that’s why need a rebalancing where you’ve got
expansionary monetary policy and a weaker exchange rate boosting
exports offsetting the dampening effect on demand of the fiscal
consolidation.”
“But the point I was making was we knew that two years ago and
there hasn’t been any significant news since then and I’d say that
current spending may have been a bit weaker than was planned but the big
picture is that the fiscal consolidation has worked out as expected, the
funding costs of UK banks has not fallen back as we’d expected, that’s
because of their links to the euro area, and also that the squeeze on
real take home pay has continued for that bit longer and that bit more
than we had thought.”
Q16: Are you worried that austerity consensus in euro zone is
fraying around the edges?
King: “That’s not for me to judge, it’s for them. All I would say
is that I would refer you to what I said earlier which is that the
underlying problems are not really fiscal problems, the underlying
problems are of competitiveness, external deficits and the need to
insure that the differences in competitiveness that have emerged in
the last decade can be undone and economies moved back to a position
where very large flows can be significantly reduced in order that the
debtors can no longer be as large debtors and the creditors won’t be as
large creditors that’s the ultimate problem that has to be tackled.
Now there’s several ways that you can do that but that’s for the euro
area to judge and not for me.”
“If you’ve got countries that have lost so much competitiveness
that they’re continuing to have to borrow money from abroad without any
obvious end in sight, someone has to be prepared to finance that and
what happened in the second half of last year was that the private flows
financing external deficits dried up and have been replaced by official
flows. They can’t go on indefinitely otherwise the debt burdens become
unsustainable some means have to be found for ensuring that those flows
get turned around.”
-London newsroom: 4420 7862 7491 e-mail: drobinson@marketnews.com
wwilkes@marketnews.com
[TOPICS: M$$BE$]