LONDON (MNI) – Bank of England Deputy Governor Charles Bean said
Monday that an “unhappy” ending to the Eurozone sovereign debt crisis
could prompt an additional round of quantitative easing in the UK.

“If the Eurozone sovereign debt crisis unfolds in an unhappy
fashion, then I think it is quite plausible that that would have a
significant adverse impact on the UK and that we might well want to
undertake a further round of quantitative easing,” Bean told the Market
News International Annual Seminar here.

“There are very significant downside risks,” he said.

The past depreciation in sterling was chiefly to blame for
persistent above-target inflation, Bean explained, but added that he
thought that past drops in the value of the pound had now almost
completely worked through.

“The big thing that sets the UK apart is the depreciation” of
sterling, he said. Neither the US nor the Eurozone “have had a 25%
depreciation” in the value of their currency.

“There shouldn’t be very much more effects of past depreciation
left to pass through,” he added.

Whilst noting the recent rise in consumer inflation expectations,
Bean said that the MPC would be far more concerned if longer-term market
inflation expectations were to rise.

“So far those movements in longer-term inflation expectations have
been relatively modest,” he noted. “Financial market expectations remain
relatively stable, particularly those derived from inflation swaps.”

In calculating how much spare capacity remains in the UK economy,
Bean suggested that the Bank of England could be guided by past

“The best way to try and gauge the margin of spare capacity is to
look at previous downturns related to banking crises,” he said. “We need
to dig down a little more into the processes… That may require more of
a case-study approach.”

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