–BOE King: Those Saying MPC Laying Hike Ground Getting Ahead of Selves

LONDON (MNI) – Bank of England Governor Mervyn King mocked the idea
of making a token rate hike to try and restore the inflation fighting
credibility of the Monetary Policy Committee.

King said the MPC was not in the business of futile gestures. The
BOE Governor, speaking at the press conference following the February
Inflation Report, said those pundits who took the view the MPC was
laying the ground for a rate hike with its inflation forecasts were
getting ahead of themselves.

King made the case that monetary policy should look through near
term inflation.

“What really matters for monetary policy now is not the current
inflation rate, to try and do anything about that, one can’t, it is
looking ahead and asking the question what does all this mean for the
outlook in the medium term,” King said.

King said the high inflation outturns now do create upside risks
for inflation in the medium term “if people try and push up money wages
and prices because they expect higher inflation to persist.”

On the other hand King said there were downside risks to inflation
to inflation from the significant margin of spare capacity, demonstrated
in Wednesday’s labour market data, showing the jobless rate rising.

“It is very, very difficult to balance those risks. It is our job,”
King said.

“We think (those risks) are equally balanced at present. That is
why we didn’t raise Bank Rate and we will have to continue to make those
judgements,” King said.

Sterling Fall Is Key Source of Inflation

In other remarks at the press conference King said that the reason
that the BOE has been unable to keep inflation below-target because of a
past 25% fall in sterling’s nominal exchange rate.

“We have experienced a 25% fall in our nominal effective exchange
rate which has not been experienced by other countries in the Without
that we would have had a much deeper recession. industrialised world…
” he said.

When quizzed on whether rising cost pressures are frittering away
the competitive advantage gained from the decline in sterling, King said
that that was not the case.

“The “frittering away” as you describe it would occur only if
domestic cost prices were to rise in such a way as to obviate the
benefits of the depreciation. That has not occurred. There is no sign
yet that wage inflation has picked up,” he said.

King also said that the MPC cannot know which of its scenarios in
the inflation report will materialise.

“The chances of a central projection coming true are almost zero.
There are enormous risks but you can’t tell which risks will
materialise, whether they will be upside or downside,” he said.

–London newsroom: 4420 7862 7491 e-mail: drobinson@marketnews.com

[TOPICS: M$B$$$,M$$BE$,MABPR$,MT$$$$]