–Adds Detail To Version Transmitted At 1124 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.

At the press conference following the November Inflation Report
King stressed that the MPC did not believe QE is ineffective,
highlighting 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.

King also said that the fact that the transfer of coupons from the
Asset Purchase Facility to the Treasury would also provide monetary
stimulus were key reasons 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 raised sharp criticisms by 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 effects 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,” he said.

The BOE Governor returned to the theme of his recent LSE 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
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 restated his views on the limits of monetary
policy: 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.

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
crisis.

“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
merit.”

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outdated measures of index numbers, which could certainly be improved.”

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

[TOPICS: M$$BE$]