–Adds Detail, Recasts Version Transmitted At 1011 GMT
–EU Policymakers Looking To Get A Year of Two’s Breathing Space
–Euro Area Deterioration Key To Decision To Sanction More QE In Oct

LONDON (MNI) – Bank of England Governor Mervyn King has said that
the BOE’s Monetary Policy Committee almost sanctioned quantitative
easing at its September meeting but instead decided to wait-and-see if
euro area officials could cram the sovereign debt crisis genie back into
its bottle.

King said that the MPC decided to act because market volatility
continued and euro area policymakers did not come up with any solution.
In an evidence session with the Treasury Select Committee, the BOE
Governor said that euro area policymakers were looking to this week’s
summit to secure some breathing space amid the market turmoil.

King was questioned by TSC members over the MPC’s sudden vote
switch, with only one member voting for more QE in September and all
nine backing stg75 billion in extra QE at the October meeting.

“The thing that really made the big difference was the change in
the outlook for Europe and the world,” King said.

The BOE Governor also said that as the outlook for Europe
deteriorated “there were very strong falls in business and consumer
confidence and we felt this could have a material impact on the outlook
for demand in the economy.”

“In September we pretty much reached that judgement but we felt
that perhaps things might improve, perhaps there might be some solution,
albeit temporary, to the problems in the euro area, which would lead to
a restoration of confidence. But, of course, we haven’t seen that,” he
said.

King also said that he didn’t expect a comprehensive solution to
the euro zone crisis to emerge any time soon.

“The underlying problems haven’t changed at all and they won’t
change. The aim of the measures to be introduced over the next few days
(at EU level) is to create a year, or possibly two years’, breathing
space but the underlying problems haven’t been resolved,” King said.

“Whatever view you held at the beginning of the summer, you should
hold a somewhat different view at the end of the summer” he stated.

King told the TSC that the minutes of the MPC’s meeting showed “we
came very close to voting for further asset purchases in September.”

While the vote was not close the minutes showed that further QE
in the near-term was highly likely.

“We did not take the step forward (on QE) … because at that
September meeting we were very conscious of there being significant news
in August, particularly in financial markets and it could have been
that that volatility worsened over the next month,” he said.

The MPC ended up voting to relaunch QE in October, just after the
official September inflation data were released showing CPI spiked to a
3 year high at 5.2%.

King said that the MPC has been concerned about the impact of high
headline inflation, but second round effects have not materialized.

“One of the things concerning us … over the last year has been
whether the experience of inflation persisting above the target might
lead inflation expectations to move up, and that that would cause some
real problems in trying to bring inflation down later on,” King said.

“As time has passed, I think what we have seen is that there has
been very little evidence that inflation expectations in the long term
have actually risen,” he added.

“Perhaps most compellingly, wage increases have remained very
subdued. I think the evidence on that, particularly as it came through
in the late spring and through the summer … (showed) the balance of
risks had shifted,” King said.

King also told parliament that the latest round of quantitative
easing is designed to boost demand, spending output and inflation.

“Any monetary policy easing is going to have the effect of
expanding demand, spending, output and ultimately inflation. That is was
what monetary policy easing is designed to do,” King said.

King said that he was concerned about persistently high inflation,
but that he thought that it was a necessary step in the economic
rebalancing process.

“It’s the same inflation rate as in 2008 … but I certainly accept
that what’s happening in the economy now is a very large squeeze on
incomes. Real take home pay has fallen by more in the last two years
than any time in living memory,” he said.

“They are the consequences of higher value added tax, higher food
prices and a fall in the real exchange rate which was necessary for us
to be able to rebalance our economy a way that was vital after a period
of a relatively overvalued exchange rate,” King added.

“When we undertook the next round of asset purchases we did
it because we thought that there were real risks that inflation looking
ahead would fall below the (2%) target, we wanted to offset that,” he
said.

Appearing alongside King, BOE Deputy Governor Charles Bean also
said that QE could add some 0.5 percentage point to growth and
inflation, but the impact on employment was uncertain, as the labour
market has behaved in surprising ways throughout the financial crisis
and into its aftermath.

TSC chairman Andrew Tyrie summoned King and BOE Deputy Governor
Charles Bean following the Monetary Policy Committee’s decision to
sanction stg75 billion of further QE at its October meeting.

–London newsroom 0044 20 7862 7491; email:
drobinson@marketnews.com/wwilkes@marketnews.com

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