London (MNI) – The world has taken a turn for the worse in the past
few months it is hard for domestic economic policy to offset that, Bank
of England Governor Mervyn King said.

In comments to the Treasury Select Committee ahead of Tuesday’s
Autumn Statement in which Chancellor of the Exchequer George Osborne is
set to unveil measures aimed at boosting credit to smaller companies and
to boost infrastructure spending, King was skeptical about what can be
achieved with domestic policy.

The governor said the BOE’s Monetary Policy Committee was concerned
that the weaker economic outlook would lead to companies cutting
investment plans, thereby fueling unemployment.

“The concern that came up in our discussion on the committee was
that around the year end, beginning of the year, many companies would
review their investment intentions for next year and then we would see
the impact come through on unemployment,” he said.

King said there had been a large downgrade in business investment –
“no question about it”, but he questioned what policy could do about it
and also said the hoped for rebalancing of the UK economy had been hit
by events overseas.

“There are serious limits as to how far domestic economic policy
can proceed by trying to stimulate further domestic demand,” King said.

While sterling has fallen on a trade weighted basis, “We haven’t
seen increases in domestic cost inflation which would erode the value
of the depreciation of the exchange rate, we have maintained low rates
of interest (during the) crisis.”

“So we have taken actions to ensure that rebalancing can occur and
we have been affected badly by an adverse development in the rest of
the world, primarily in the euro area … but we have seen now signs of
slowing in Asia and the United States,” King added.

“The world has taken a turn for the worse in the last few months
and that is bound to affect what we can do. We can’t easily offset
that,” he said.

King highlighted the problems being created by the euro area
turmoil. He said funding strains were causing a great deal of concern at
present in light of the Eurozone crisis.

He hoped for a solution to it soon, saying it could not go on
indefinitely.

He was asked about the weakness of UK money growth, and whether
this showed quantitative easing was not working.

“To me the big picture is what matters here. I think the broad
money numbers are a good example of a glass half-full and half empty,”
King said.

“The half-full picture is that despite the fact we have had an
extraordinarily serious financial crisis and we are still bang in the
middle of it, that broad money is still growing at a positive rate,” he
said.

He noted that in the Great Depression in the US money growth fell
very sharply, and he said the fact it was not falling “is a success of
policy. It would have been worse if policy actions had not been taken
and, I think, if we hadn’t done asset purchases broad money would have
been much weaker than it is now.”

“The half-empty, of course, is that we are still deep in a
financial crisis with weak output and we are still a long way from
getting back to normal,” King added.

Two other MPC members, Ben Broadbent and Martin Weale, downplayed
the importance of the money supply figures.

“I don’t see that broad money tells us very much that we didn’t
know anyway. From my perspective I think the main influence of our asset
purchase programme is through its influence on long term interest rates
and the knock-on effects on other asset prices,” Weale said.

For further information contact David Robinson on 4420 7862 7491
or e-mail: drobinson@marketnews.com.

[TOPICS: M$$BE$]