BLBG: King Says BOE Would Tighten Policy Over 2-3 Years
By Svenja O’Donnell and Scott Hamilton
Nov. 24 (Bloomberg) -- Bank of England Governor Mervyn King said the central bank will raise the benchmark interest rate and sell assets purchased during its emergency plan over a two to three-year period.
“The difficult judgment, which is the overriding problem, is to know by how much and when to do it,” he told Parliament’s Treasury Committee in London today. He said that selling the assets it has bought to bolster the economy and interest-rate increases should have similar effects, and he didn’t say which the bank would do first.
The nine-member Monetary Policy Committee split three ways in this month’s decision to lift bond purchases to 200 billion pounds ($330 billion), the third increase since the program started in March. King said he has an “open mind” about further purchases after the surprise third-quarter economic contraction put the U.K. behind the U.S., Japan, and Germany in exiting the biggest global recession since World War II.
Responding to criticism that the central bank’s forecasts for growth are too optimistic, King said that “you should expect pretty buoyant growth rates in the short run, given that we’re coming from such as strong downturn. It’s actually not a particularly strong recovery.”
The Bank of England forecasts Britain will exit recession in the fourth quarter. The economy will expand 2.2 percent in 2010 and 4.1 percent in 2011, according to projections published on Nov. 11. That compares with growth forecasts of 1.9 percent and 3.1 percent three months ago.
Growth Projections
The projections are derived from the modal path for gross domestic product growth, based on the bank maintaining 200 billion pounds of asset purchases and market expectations for a gradual increase in the key rate from the current 0.5 percent.
The pound fell 0.5 percent today against the dollar to trade at $1.6523 as of 11:01 a.m. in London. The yield on the two-year U.K. government bond fell 2 basis points to 1.21 percent.
Policy maker Adam Posen said that the bank may be wrapping up its bond purchases now.
“One hopes that we are coming to the end of the large- scale quantitative easing exercise,” Posen said. If the purchases were less effective than the bank hopes, it should consider buying greater quantities of assets other than government bonds, Posen said.
