-Adds Detail, Recasts Version Transmitted At 1035 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 put
on hold at 0.5% since March 2009 but he said the MPC’s previous concerns
about a cut still applied and he made the case instead for further
quantitative easing.

In evidence to the Treasury Select Committee King said the impact
of any cut in Bank Rate would be marginal compared to the amount of QE
the MPC can do, and the committee could expand QE without any immediate
limit or constraint. He denied the UK was in a liquidity trap

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.

The BOE Governor said the central bank 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, which saw the MPC split
five-to-four in favour of unchanged policy.

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 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.

King later said he couldn’t guarantee the Funding-for-Lending
scheme would actually boost net lending.

Another one of the trio of new policy initiatives King unveiled in
his Mansion House speech on June 14, and told the MPC about at the June
meeting, was to lower banks’ liquidity reserve requirements.

The BOE Governor told the TSC they were discussing liquidity
regulations at a global level.

At the hearing, King again highlighted his lack of optimism over
the euro area and cited the deterioration in the global outlook as a
reason why he voted for more QE in June, along with his desire not to
see a big drop in broad money growth.

“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,” King
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 added.

Miles, who has championed the re-launching of QE, said he believed
the MPC had not run out of policy road and there were signs firms were
more optimistic now than they had been about the outlook.

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

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