-Adds Detail To Version Transmitted At 1017 GMT
-MPC Broadbent: New BOE Policies Substitute for QE

LONDON (MNI) – Bank of England Governor Mervyn King left the door
ajar to a cut in Bank Rate, which the Monetary Policy Committee has had
on hold at 0.5% since March 2009, but he said the MPC’s previous
concerns about a cut still applied, including the impact it would have
on smaller building societies.

In evidence to the Treasury Select Committee King also said the UK
was not in a liquidity trap but that he was struck by how things had
deteriorated in recent weeks, since the publication of the BOE’s May
Inflation Report. He said that policy would still work by injecting more
money into the economy.

Asked about the case for a Bank Rate cut, King said the MPC had
nothing in principle against one, but was not persuaded of the case for
it now.

“In present circumstances we think the arguments which led us not
to go below 50bps last time still apply. I think we’re still concerned
that you would squeeze the net interest margins on particularly small
building societies which would make their position vulnerable and I
don’t think pushing smaller building societies out from the market would
be a terribly wise course to pursue at present,” he said.

He added, however, that “We did not rule it out, we said that that
in present conditions the same arguments would apply.”

A cut in Bank Rate was discussed in some detail at the June MPC
meeting.

” We will look at this and it may well be the case that if
conditions in money markets or deposit rates change then the argument
would be used, it’s a purely pragmatic one, we have nothing in principle
against cutting Bank Rate further if that turns out to be necessary,”
King said.

Lowering Bank Rate, however, is a side issue with the MPC having
more scope to inject stimulus through quantitative easing.

“If we’re thinking of significant monetary stimulus being necessary
then a very small cut in Bank Rate of the kind we’re dealing with here
would really not make a big difference. What we’ve been doing on asset
purchases since we started our program is in our judgement is very much
bigger than a 25 or 50bps cut in Bank Rate,” King said.

MPC member David Miles told the Treasury Select Committee that he
also though a Bank Rate cut was not the most effective way of
stimulating policy.

Asked about the feared “liquidity trap” King said “No, I don’t
think we’re there yet. That’s why I think monetary policy still does
work by injecting more money into the economy through further rounds of
asset purchases.”

He added, however, that “there is no doubt that with the additional
uncertainty this year there’s evidence of people behaving in a very
defensive way, being unwilling to invest and of course the most extreme
example of that would be if we were to get to a liquidity trap where
essentially the main assets people wanted to hold were claims on the
central bank.”

King said he hoped the fact the BOE has launched its latest
liquidity insurance operation, the Extended Collateral Term Repo
facility, would provide reassurance.

The first ECTR auction, held this month, offered Stg5 billion of
six month money, the minimum amount, with the size disappointing some
market participants. The BOE has said it would hold at least one ECTR
auction a month and King said there was not enormous demand for the
first auction, hence the minimum size.

The ECTR was set up in December but only activated this month.

“We didn’t in December feel there was a need to activate it and
indeed the information we got through our market intelligence and
conversations with major banks suggested that if we had activated it in
December there wouldn’t have been a great demand for it,” King said.

“What has changed since is that we’ve seen the impact of the ECB’s
own liquidity provisions wore off after the first two or three months,
they haven’t provided a resolution to the problems in the euro area,” he
added.

“It was better to reassure everyone that that facility (ECTR) was
there, so we’ve announced that we’ll carry out these monthly auctions.
There wasn’t an enormous demand for it last week when we launched the
first one, but most importantly it is there and people know that it’s
there and that, I hope, will provide reassurance,” King said.

King said the BOE had gone as far it could in ensuring privacy for
banks securing liquidity, with the central bank not publishing names of
banks using the bi-lateral facility, the Discount Window Facility.

-MPC Broadbent: New BOE Policies QE Substitute

Other MPC members were questioned by the Treasury Select Committee
about their votes at the June MPC meeting. At that meeting King told the
MPC the BOE was re-activating the ECTR and was in talks with the
Treasury over a joint Funding-for-Lending programme, designed to give
banks cheap credit in return of them boosting lending.

MPC member Ben Broadbent voted with the majority for unchanged
policy, while King and three of his colleagues backed more QE.

Broadbent said “It certainly felt as though conditions had
worsened” but he was concerned about inflation as “it still looked a bit
above target in a year.”

He revealed that he believed the ECTR auctions and
Funding-for-Lending would act as, at least partial, substitutes for more
QE.

“Having become aware of the possibility of these other policies
that too gave me pause because, to some degree at least, one can regard
them as a substitute, or having similar effects as … quantitative
easing,” Broadbent said.

At the hearing, King again highlighted his lack of optimism over
the euro area.

“I am pessimistic and I am particularly concerned because I think
we’ve seen for two years now the situation in the euro area get worse,
the problem being pushed down the road and not being gripped,” he said.

“I think what has particularly concerned me in the last several
months, and why I voted for more easing in policy (in June) was that I’m
concerned by the worsening I see in the position in Asia and in other
emerging markets and my colleagues in the United States are more
concerned than they were at the start of the year about what’s happening
to the American economy. This is not a comfortable position to be in,”
King said.

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

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