–Adds Detail, Recasts Version Transmitted At 1119 GMT
–BOE King: Those Saying MPC Laying Hike Ground Getting Ahead of Selves
LONDON (MNI) – Bank of England Governor Mervyn King said the
Monetary Policy Committee is not in the business of deciding what to do
with Bank Rate, then delivering hints to the market and then
“validating” market pricing.
His comments came following the publication of the February
Inflation Report, which showed the risks of inflation being above or
below target were roughly equal if market expectations of rate increases
materialized.
“We believe the right thing to do is not to try and hint or pretend
that we have decided where rate will go. We clearly haven’t,” King said
at the post Inflation Report press conference.
King also warned that events may well not unfold as envisaged in
the central projection of the report.
“Whatever looks a reasonable path today may turn out to be very
unreasonable in a few months’ time,” King said.
“We never pre-announce a decision on interest rates. We haven’t
taken one. We take those decisions month by month. Surely if we’ve
learnt anything from the past three to four years it’s that so many
unexpected things can happen even in three months,” King said.
“Some people are running ahead of themselves and saying that we are
pre-announcing or laying the ground for a rate rise. That decision has
not been taken and won’t be taken until we get to the next meeting or
the following meeting, or it may be many quarters. It will depend on the
facts,” King added.
When asked about market expectations for a series of gradual rate
hikes, starting in May, King said it was not the MPC’s business to
endorse them.
“I’m not going to say where interest rates will go. We don’t play
this game, we don’t take a decision in private and then hinting where
rates will go… Of course it’s important for markets to understand what
might happen with rates, but that is a judgement that they’re
well-equipped to make given their analysis of the economy and what they
say and given they know what our analysis is,” he said.
“We set out two particular paths (for the inflation outlook),
people can interpretate, extrapolate,” he added.
The Governor mocked the idea of making a token rate move to try and
restore the credibility of the Monetary Policy Committee.
King said the MPC was not in the business of futile gestures. The
BOE Governor also said those pundits who took the view the MPC was
laying the ground for a rate hike with its inflation forecasts were
getting ahead of themselves.
King made the case that monetary policy should look through near
term inflation.
“What really matters for monetary policy now is not the current
inflation rate, to try and do anything about that, one can’t – it is
looking ahead and asking the question what does all this mean for the
outlook in the medium term,” King said.
He said the high inflation outturns now do create upside risks for
inflation in the medium term “if people try and push up money wages and
prices because they expect higher inflation to persist.”
On the other hand King said there were downside risks to inflation
from the significant margin of spare capacity, demonstrated in
Wednesday’s labour market data which showed the jobless rate rising.
“It is very, very difficult to balance those risks. It is our job,”
King said.
“We think (those risks) are equally balanced at present. That is
why we didn’t raise Bank Rate and we will have to continue to make those
judgements,” King said.
The BOE Governor acknowledged the divisions on the MPC and among
analysts over what the MPC should do over policy at the current time.
“The argument has tended to become rather polarised, in which
everyone has got a very strong view as to what should happen to interest
rates. It is just that no one agrees on what that is,” King said.
“On the one hand, one camp will say even a small rise in Bank
Rate, no matter how small, will (put) us back into recession meaning the
hopes of recovery are dashed,” he said, adding “I don’t really
understand the logic behind that.”
“On the other hand there are those who say ‘actually a small rise
in Bank Rate won’t have any impact on growth but your credibility will
disappear if you put up Bank Rate.”
Sterling Fall Is Key Source of Inflation
In other remarks at the press conference King said that the reason
that the BOE has been unable to keep inflation below-target because of a
past 25% fall in sterling’s nominal exchange rate.
“We have experienced a 25% fall in our nominal effective exchange
rate which has not been experienced by other countries in the Without
that we would have had a much deeper recession. industrialised world…
” he said.
When quizzed on whether rising cost pressures are frittering away
the competitive advantage gained from the decline in sterling, King said
that that was not the case.
“The “frittering away” as you describe it would occur only if
domestic cost prices were to rise in such a way as to obviate the
benefits of the depreciation. That has not occurred. There is no sign
yet that wage inflation has picked up,” he said.
King also said that the MPC cannot know which of its scenarios in
the inflation report will materialise.
“The chances of a central projection coming true are almost zero.
There are enormous risks but you can’t tell which risks will
materialise, whether they will be upside or downside,” he said.
–London newsroom: 4420 7862 7491 e-mail: drobinson@marketnews.com
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