LONDON (MNI) – Bank of England Governor Mervyn King has denied
that there is a secret pact between himself and the Chancellor that
would see the MPC would keep an ultra-loose monetary policy stance to
help offset the drag on demand caused by fiscal tightening.

“No, we are setting monetary policy in order to meet the inflation
target, taking into account the fiscal consolidation plans the
government has announced,” King told the House of Commons Treasury
Select Committee.

“I don’t discuss the stance of monetary policy with the
chancellor. He doesn’t attempt to influence the decisions of the
Monetary Policy Committee…,” he said.

In his testimony to the TSC, King said that markets remain
confident that inflation will not continue to trend higher through 2011.

“Financial markets clearly do not believe that the rate of increase
in prices will persist, even if the levels do persist,” he said.

“The debate on the committee is not about whether that (CPI falling
back to target) will happen, but when it will happen,” he added.

Addressing a question on what the MPC would do if the economy were
to weaken sharply, King ruled out a further cut in Bank Rate, adding
that the MPC would fire off another round of asset purchases if the
balance of risks to inflation became significantly skewed to the
downside.

“I don’t think it’s likely that under any circumstances that we
would try to cut Bank Rate below the 0.5%. When we felt last year that
we needed to loosen monetary policy further, we made further asset
purchases,” he said.

“If we felt the reason that inflation was high was temporary, and
inflation would come down and that the sluggish growth created a risk
that inflation would fall below the target, and if we felt that that
risk was sufficiently high that the balance of risks to meeting the
inflation target was on the downside rather than on the upside, then I
think that the set of circumstances could result in further asset
purchases,” he added.

-London newsroom: 4420 7862 7491; email: ukeditorial@marketnews.com

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