–Adds Detail, Quotes To Earlier Versions
–Tucker: Worried About Damage To UK Supply Capacity From Weak Growth
–Tucker: MPC Must Ensure People Don’t Lose Faith In It

LONDON (MNI) – Bank of England Deputy Governor Paul Tucker said
the call from the Bank for International Settlements for higher interest
rates should not be dismissed, and he said it was vital people did not
lose faith in the BOE Monetary Policy Committee’s commitment to hitting
its 2.0% inflation target.

In evidence to the Treasury Select Committee, Tucker also
highlighted the concern that weaker-than-expected growth would erode the
UK’s supply capacity – and he said he had only wanted to hike Bank Rate
when growth was strong enough to absorb spare capacity. The recent high
inflation and soft growth outturns, however, had made policy making
“peculiarly difficult”, Tucker said.

“The economy has turned out softer this year than I would have
expected. My own position has been that we should start to withdraw the
monetary stimulus once we have securely achieved what I call escape
velocity – growing at a pace that absorbs the slack in the economy,”
Tucker said.

“The economy has been mostly weaker-than-expected and that
(achieving escape velocity) hasn’t happened,” he added.

“We now face another risk though. The longer the weakness persists,
the more likely it is that the supply capacity of the economy will get
eroded – which in plainer terms means that long term unemployment
increases … investment remains weak and capital gets scrapped,” he
said.

“We could find ourselves in circumstances where the upward
pressures on inflation don’t come from strong growth but come from an
erosion of supply and it is for that reason … I do think that it is a
peculiarly difficult moment to make policy,” he added.

“The transmission mechanism of our instruments is more complicated
than usual but I don’t think that is the big thing. The big thing is
that the forces buffeting this economy are frankly are all over the
place, making it very difficult to predict what is going on,” Tucker
said.

“The only thing that we must remain absolutely determined about in
those circumstances is people don’t lose faith in us and our
determination to keep inflation coming down,” Tucker said.

“We are not happy with inflation that has been so much higher than
our target, of course we are not.”

“This has made life much more difficult for the country and much
more difficult for us in undermining our credibility.”

On the question of extending quantitative easing, Tucker said the
MPC is not a committee “drifting towards thinking that more stimulus may
be needed” adding “the threshold for me (for increased stimulus) is
high.”

–London newsroom: 4420 7862 7491; email: drobinson@marketnews.com
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