–Adds Detail, Quotes, Recast Lead From Earlier Versions
–King: Believes Spread Compression Will Occur If BOE Hikes Bank Rate
–Tightening Policy Now Would Create Undue Output Volatility
–Liquidity Support Just Buying Time For Greece, Not Solving The Problem

LONDON (MNI) – Bank of England Governor Mervyn King said the
Monetary Policy Committee would be accused of taking the “easy option”
if it sanctioned more quantitative easing and it could make it harder to
get inflation back to target in the medium term.

King highlighted the difficulties facing the UK economy, but when
asked in front of the Treasury Select Committee why he did not back more
QE he said it could damage the MPC’s ability to get inflation back on
track.

“It is going to be an uncomfortable period. There is no doubt about
that but our task clearly is to set Bank Rate on a path which we think
will bring inflation back to the target in a reasonable time horizon,”
King said.

Asked why the MPC has not sanctioned more QE King said “I think it
would, albeit in very much more difficult circumstances than most in the
past, be another example where we would be accused of having taken the
easy option and hence made more difficult the ability to get low
inflation in the medium term.”

King said he expects lending spreads to narrow when Bank Rate is
hiked, but also said the majority of the BOE’s Monetary Policy Committee
had voted against a hike because of concerns it would create output
volatility.

If spread compression does occur after a rate hike, the impact of
that hike would be cushioned. King said that the MPC was acting in line
with its remit in not tightening policy despite current high inflation
outturns.

The BOE Governor once again attributed current high inflation
outturns to import cost, tax hikes and energy price increases.

“Our task is to meet the remit set by you (parliament) and that
remit does allow for us not to try to bring inflation back to the target
immediately if that would lead to undesirable volatility of output,” he
said.

“I think most of us on the committee have taken the view that to
tighten policy now would be to risk that,” King added.

On his own policy stance King said “I voted for no change. I
haven’t voted for an increase in asset purchases. But I think the
differences between members of the committee are easy to exaggerate.
After all, the differences range only from whether interest rates should
rise by a quarter of a percentage point now to whether there should be
an extra stg50 billion of asset purchases.”

He said the MPC policy divisions were “within the broad context of
a position in which inflation is clearly uncomfortably high and this is
represented as a symptom, it is not a cause it is a symptom, of a very
substantial squeeze on real living standards.”

King was asked about market confusion over where the MPC is heading
with policy given the splits within the committee.

“When we’re at a turning point the market is concerned about the
direction of travel. But I think the big picture is one where the
challenges facing the committee are agreed and understand by everyone on
the committee,” King said.

“The right debate, and the one which we should always have, is
precisely what we do at this stage and there is a range of people that
respond adamantly that we should engage in more stimulation now. There
are a few others, including Spencer (Dale, BOE Chief Economist), that we
should now start the process of tightening from now,” he said.

“Both of these (policy camps) have very good arguments … No doubt
at some point we shall choose one or the other of these actions,” he
said.

“But … the evolution of the economy, how the data unfolds will
tell us which way to go. I think at this stage what is helpful , in
terms of the (policy) calendar, everyone in the market knows what the
arguments are, and I think that’s the most important thing. Everyone in
the market has their own view as to where the economy will go, but what
we want to do is point out of them what the balance of risks in our
judgment to inflation are looking 18 months to 2 years ahead,” King
said.

The BOE Governor restated his concerns about the way UK households
are seeing their incomes, adjusted for inflation, coming under pressure.

“I am definitely concerned by … the squeeze on real income. I
don’t believe it is easy to do much about that,” King said.

“This is the way in which we as a country are adjusting to the
consequences of a crisis, and the macro economic rebalancing that is
necessary to get through that,” he added.

Contingency Planning For Greek Default

In the early part of his evidence to the Treasury Select Committee,
King was grilled about the likelihood of a Greek default. He refused to
be drawn on the probability of a default, but said it was high enough
for the BOE to have put in place contingency plans.

He noted that the BOE’s Financial Stability Review assessment
showed the market “ascribes a probability of 80% to some aspect of
default.”

“The more important thing (than guessing how likely a Greek default
is) is to try and tackle the underlying problems,” King said.

With the market placing a high probability on default that is
enough “for us to think carefully about contingency plans and the
consequences of a default.”

King said one of the message he was delivering when he presented
the Financial Stability Review last Friday was that liquidity support,
to Greece and elsewhere, was just a way of buying time.

“Providing liquidity support may buy time to put in place a
long-term strategy, under which this competitiveness can be regained.
So far the time that has been bought by the provision of liquidity has
not really been used to put in place programmes that can guarantee
significant improvement and competitiveness,” he said.

“Buying time is not sufficient, that time has to be used,” he
added.

“I don’t think that buying time appears attractive very often
because the immediate crisis appears to go away. You’ll get to bed
earlier, you’ll relax more. But in fact the underlying problems have not
changed, the crisis comes back in more severe forms and that has been
the case going through the past 18 months in trying to deal with Greece,
Portugal and Ireland,” he said.

–London newsroom: 4420 7862 7491; email: drobinson@marketnews.com
[TOPICS: M$B$$$,M$$BE$,MT$$$$]