London (MNI) – The following is the text of the key passages of
Bank of England Governor Sir Mervyn King’s written annual statement to
the Treasury Select Committee Tueesday.

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Report to Treasury Select Committee

Sir Mervyn King

Governor

November 2012

Report to the Treasury Select Committee
Mervyn King, Governor of the Bank of England
27 November 2012
Past voting record and the outlook

Over the past year inflation has fallen sharply, while volatile
headline GDP data have masked an underlying picture of stagnant output.

Our economy has faced an increasingly difficult external
environment as the euro area has been engulfed by a crisis whose
severity has become progressively more obvious. As a result, a black
cloud of uncertainty has weighed on confidence, household spending, bank
funding costs and business investment. That has been reflected in slower
than expected output growth at home, and has prompted further easing in
monetary policy from its already exceptionally accommodative stance.
With the Monetary Policy Committee (MPC) unanimous in voting to keep
Bank Rate at 0.5% each month, that easing has been implemented via gilt
purchases. In broad terms, the policy debate has been framed by the
question of whether there is room to stimulate the economy without
posing an unacceptable risk to inflation in the medium term. I have
taken the view that the slow growth of wages signals subdued underlying
domestic cost pressures, despite weak measured productivity. The
puzzling weakness of measured productivity is likely in part to reflect
a large persistent but not permanent fall in underlying productivity
relative to its pre-crisis trend. But in my view it is also likely that
a recovery in demand would prompt a rapid improvement in measured
productivity, implying a stronger case than otherwise for monetary
easing.

A year ago, the MPC was part way through a programme of 75bn of
asset purchases that had begun in October 2011. The problems in the euro
area were intensifying. CPI inflation was close to 5%, having been
pushed up by VAT, energy and import prices. Although we expected
inflation to fall back over 2012 as the effect of these temporary
factors dissipated, there was considerable uncertainty around its path.
Nevertheless it was reassuring that underlying domestic inflationary
pressures remained subdued, with wage growth close to 2% and slack in
the labour market, such that on the balance of risks inflation looked
likely to be around target in the medium term.

Little had changed at the time of our December meeting. By January
there had been an improvement in financial market sentiment prompted by
the ECBs longer-term refinancing operation. But, while this initiative
reduced the immediate risks facing European banks, it did not tackle the
fundamental problems of indebtedness and competitiveness in the euro
area. At our December and January meetings I voted to continue with the
announced programme of asset purchases.

At the time of our February meeting, inflation had fallen
substantially, to 3.6% in January. Despite some signs of improvement in
world activity indicators, the outlook for UK growth remained weak in
the near term due to stagnation in the euro area. In our February
Inflation Report we judged that, without further asset purchases, the
slack in the economy would cause inflation to undershoot the target in
the medium term. I therefore voted to increase the stock of asset
purchases by 50bn to 325bn, which would be implemented over three
months. At our March and April meetings the outlook had not changed
sufficiently to warrant a change to this policy. In May I did not vote
for further asset purchases, although this decision was finely balanced.
By June inflation had fallen further and the threat to UK and global
activity from tensions within the euro area had intensified. The balance
of risks to inflation had shifted to the downside, and I voted for 50bn
of asset purchases in both June (in a minority) and July (in a
majority). Those decisions took into account the likely impact of the
Funding for Lending Scheme and the activation of the Banks Extended
Collateral Term Repo facility. At each subsequent meeting I have voted
to maintain the stock of asset purchases at 375bn. In November that
decision took into account the effect of the Governments decision to
use the cash holdings in the Asset Purchase Facility to reduce the stock
of government debt.

Looking ahead, policy continues to face some fundamental
challenges. The economic outlook, described in detail in the November
Inflation Report, is for a slow recovery in output with inflation above
target for some time, but declining in the medium term. Underlying this
outlook is an unfavourable external environment. Imbalances in the
pattern of international spending remain. With surplus countries
reluctant to expand domestic demand and deficit countries restraining
domestic spending to reduce their debt ratios, we have a recipe for weak
global growth. Such an outlook poses real challenges for our strategy of
rebalancing the UK economy. It may be unreasonable to expect anything
other than a slow and protracted recovery absent a further fall in the
real exchange rate. In such an environment, there are limits to the
ability of domestic policy to stimulate private sector demand as the
economy adjusts to a new equilibrium.

Nevertheless, I stand ready to vote to adjust policy in either
direction as the balance of risks to the outlook for inflation
changes. In the event that further easing is required, I believe it
appropriate to continue with our policy of purchasing gilts.

Explaining monetary policy

Over the past year, I have delivered six on-the-record speeches
covering aspects of monetary policy and given four Inflation Report
press conferences. I have appeared in front of the Lords Economic
Affairs Committee once and the Treasury Committee three times to explain
monetary policy (in addition to which I have made four other
parliamentary committee appearances). I gave an extended live interview
on Channel 4 News in September, and on average have made a televised
appearance about once every 3 weeks. In addition I have made six
regional visits around the UK, to the Central Southern region, the South
East, the North West, the West Midlands, the South West and Wales. These
involved numerous company meetings,

events with local business people, and speaking engagements. The
visits provide an important regional perspective to monetary policy, as
well at the opportunity to explain the MPCs decisions. I have had
further opportunities to explain monetary policy in the many informal
talks I give off the record. Over the past year, I have also attended
many meetings of various different international bodies the G7, G20,
IMF, ESRB and BIS.

–London Bureau; Tel: +442078627499; email: ukeditorial@marketnews.com

[TOPICS: MT$$$$,M$$BE$]