London (MNI) – The following is the full text of Bank of England
Governor Mervyn King’s opening statement to the Treasury Select
Committee Wednesday.
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May I first congratulate you Chairman, and all members of the
Committee, on your election. I very much hope our sessions together will
prove constructive. I am particularly grateful to the Committee for
allowing this session to take place today so that earlier this week I
was able to attend the meeting in Basel of central bank governors and
heads of supervision that took a further step forward towards a new
global Basel III deal for capital and liquidity requirements on banks.

In the years ahead, stronger capital and liquidity standards will
help to ensure our financial system is more robust, leaving it less
likely to succumb to a crisis. But in Basel we reaffirmed our collective
view that it is important to implement the new standards over a long
transition period because bank balance sheets are still recovering from
the current crisis. And we need banks to be able to expand their lending
in order to support the wider economy before they are required to meet
the new standards.

The gradual improvement in credit conditions that was evident
earlier in the year seems to have come to a halt in recent months. And
financial markets more generally have been volatile. In part that is
because continuing concerns about the ability of some countries to
achieve necessary fiscal consolidation are affecting confidence in the
ability of banks to repair their balance sheets. More fundamentally, the
key underlying causes of the crisis in terms of the imbalances in
global demand have still not been tackled. Those imbalances are likely
to be larger this year than last, and will probably still be around
three-quarters of their level at the peak immediately prior to the
crisis. Until these underlying problems are resolved, uncertainty about
the outlook for the world economy will remain.

Last week, we learned of the strong 1.1% estimate of GDP growth in
the second quarter. On the face of it, that is encouraging. But we must
be careful not to read too much into one number. And the wider economic
problems around the world underline the fact that we cannot be confident
that the recovery in demand, output and employment here in the UK will
be sustained. We continue to face the challenge of rebalancing our
economy away from consumption towards net exports, and raising our
national savings rate. During the rebalancing, there is a risk that the
level of money spending in the UK will remain weak, with the economy
operating below capacity. That would push down on inflation
potentially to a rate that is significantly below the 2% target.

But there are also risks on the upside. CPI inflation is currently
above target at 3.2%, and it has been high for much of the past four
years. Given the changes to VAT announced in the Budget, it is likely
that inflation will remain above target for much of next year. If this
high inflation were to become engrained in inflation expectations, it
would be difficult to bring inflation back down again.

The MPC faces a difficult challenge in balancing those risks. To do
so, we judge that at present it is right to keep our foot firmly on the
accelerator in order to stimulate the economy. As you would expect,
there is a debate about quite how hard we should be pressing on the
accelerator. In the months ahead it may be that the MPC judges that the
inflation outlook warrants pushing down even harder or that we should
ease back somewhat. The debate is about the appropriate degree of
stimulus, not about applying the brakes.

Of course, there will come a point when we will certainly need to
ease off the accelerator and return Bank Rate to more normal levels. I
look forward to that time because it will probably be a signal that
there is a smoother drive ahead, with the economic outlook improving in
a durable way. But I fear there is some considerable distance to travel
before we can begin to use the word normal.

With that, Chairman, I and the other members of the MPC here today
stand ready to answer your questions.

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

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