–Adds Detail To Version Transmitted At 1154 GMT

LONDON (MNI) – The Bank of England’s Monetary Policy Committee has
not lost faith in asset purchases and the MPC voted not to increase QE
at its November meeting because of the inflation outlook and the
monetary easing coming from the decision to transfer excess cash from
the BOE’s gilt holdings to the Treasury, BOE Governor Mervyn King says.

At the press conference following the November Inflation Report
King stressed that the MPC did not believe QE is ineffective,
highlighting the other reasons why the committee had not extended it.

“I think the outlook for inflation in the Inflation Report we
published this morning explains exactly why we paused,” King said.

He also said that the fact that the transfer of coupons from the
BOE’s Asset Purchase Facility to the Treasury would also provide
monetary stimulus was a reason why the MPC held back from sanctioning
more asset purchases at its November meeting. These transfers, of gilt
coupon payments, provide the Treasury with a stg37 billion windfall.

“We know that there is going to be approximately stg37 billion of
equivalent asset purchases implied by the transfer of coupons in the APF
fund to the Treasury. That will take place over the next ten months.
Given that that is going to happen, given the outlook for inflation I
think that the committee felt that no change was the right decision last
week,” King said.

The coupon transfers have provoked sharp criticisms from some
analysts and pundits over the blurring of fiscal and monetary policy but
King refused to accept it was a serious issue.

“To be honest I think there’s a lot of fuss about nothing with this
scheme (transfer of coupons). I don’t think it affects anything very
much,” he said.

“The Treasury are the beneficial owners of all the money in the
Asset Purchase Facility. They’re taking some cash out now. It’s
perfectly reasonable to do that rather than issue gilts, to allow the
cash to stay in the APF. It’s what happens in Japan and the United
States. We know what the effect of this transfer will be, we will offset
that in our own asset purchases, we remain firmly in control of monetary
conditions,” King said.

The BOE Governor returned to the theme of his recent London
School of Economics speech on the limits of monetary policy.

He said that in the current environment “there are limits to the
ability of domestic policy to stimulate private sector demand … But
the Committee has not lost faith in asset purchases as a policy
instrument, nor has it concluded there will be no more purchases.”

Some members of the MPC, however, have expressed doubts about the
effectiveness of QE at present. King denied that this amounted to a
belief it was intrinsically less effective.

“I don’t think anyone on the MPC is saying QE in and of itself is
less effective in the sense that the more you do the less effective it
becomes,” he said.

He acknowledged, however, that the effectiveness of QE is not
constant through time.

Everyone on the MPC does believe “that the circumstances in which
you carry out the asset purchases do make a difference to its
effectiveness,” King said.

The BOE Governor said that policy cannot continue indefinitely to
postpone the rebalancing of the UK economy towards a more export
oriented, lower debt, higher saving economy.

“As you go through the process of adjustment to a new, real
equilibrium there will be difficulties in trying to persuade people to
hold off getting there. You can’t postpone for ever the adjustment to
the new real equilibrium,” he said.

One part of the rebalancing jigsaw that is missing is a pick-up in

“What the UK economy needs is more demand in the rest of the world
to buy goods from the United Kingdom. That is the key bit that’s missing
from our attempt to rebalance. That’s why the challenge is so great.
We’re not the only economy in that position,” King said.

The BOE Governor was asked, with the economy recovering only slowly
and sterling strong whether he would welcome a fall in the currency.

“I never call for changes in exchange rates. They are things which
are given by the markets to central banks,” he said.

Nevertheless, King was clear that was not happy about sterling’s
rise of 8% in the past 15 months since the intensification of the euro

“That is not a welcome development,” he said.

On another hot topic King was asked about the work being done on
changing the way RPI is calculated to create a new measure and the
possibility of changing the MPC’s current 2% inflation target.

He welcomed the work on the RPI changes but urged caution over
altering the inflation target.

“It is always sensible not to mess around with targets too often.
But … what I hope will happen is that the new measure, once it is
produced, will provide more information about the inflation process and
will enable you and others to form judgements about what exactly is
going on to the underlying inflationary picture,” he said.

On the proposed changes to the RPI measure, which would bring it
closer to CPI, King said “Anything that would reduce the wedge between
those two (RPI/CPI), which is not entirely easy to understand, has some

He said the Office for National Statistics is “using somewhat
outdated measures of index numbers, which could certainly be improved.”

King was also asked about Wednesday’s labour market data, which
showed an unexpected rise in claimant count unemployment in October. The
BOE Governor downplayed the rise.

“This is still a pretty strong labour market, of course it is not
easy to reconcile that with the picture of underlying growth still being
so weak. But I think 2013 will be a year in which we will really, I hope
learn a lot more about how to resolve these different patterns between
what’s happening in output and what’s happening in the labour market,”
he said.

–London newsroom: tel+44 207 862 7491; e-mail:
drobinson@marketnews.com; wwilkes@marketnews.com