Adds Detail, Quotes To Version Published At 1916 GMT

LONDON (MNI) – The Bank of England Monetary Policy Committee has
been right to let inflation run above target for a prolonged period of
time, Governor Mervyn King says.

In his speech at the London School of Economics King set out the
case for central banks aiming “off target” to try and reduce the risk of
future financial crisis and in the Q and A he argued the MPC has been
justified in accommodating a lengthy run of CPI outturns above the 2.0%
target in order to avoid a recession.

King also said that he had concerns about the limits of monetary
policy and doubts that it could continue to stimulate demand by bringing
forward future spending into the present.

CPI rose above its 2.0% target in December 2009, hitting 5.2% in
September 2011 before declining to 2.5% in the most recent, August,
data.

“If you look back over the last three or four years … we have
accepted a overshoot of the inflation target for a longer period than we
would have wished in order to prevent what would had have to have been a
much deeper recession in order to keep inflation closer to the target,”
King said.

“There may be other reasons in the future for accepting an
overshoot, or indeed an undershoot of inflation, below the target, not
forever but for a period few years, in order to make it less likely that
the risk of financial instability would build up,” he added.

He said that the credibility the MPC had built up had allowed it to
accomodate above target inflation without destabilising inflation
expectations.

“They (inflation expectations) are still well anchored,” King said.

Asked about the UK’s growth outlook King said he and his colleague
simply didn’t know what would happen, and they didn’t know how events
would unfold in the Eurozone.

“I think a decent central view, and there are big risks on either
side, would be a slow and gradual recovery,” he said.

While there are no technical limits to the amount of assets the BOE
can buy through quantitative easing, King said he did have concerns
about the ability of the MPC to keep stimulating the economy.

“There’s no limit on the amount of asset purchases we can make, the
scale of the deficit at present is such that the government is issuing
more debt than we are buying by some considerable margin. There’s no
technical limit on the asset purchases we can do,” King said.

“A deeper question, I think, at present is how much more can
monetary policy do to stimulate the economy? I think there are some
important questions about that,” he said.

“What it (monetary policy) is also doing at the same time is giving
people incentives to bring forward spending from the future to the
present by giving incredibly low effective interest rates so spending
today rather than the future is attractive,” King said.

“Unfortunately as time goes by you get to tomorrow and once you’ve
got to tomorrow you realise you’ve dug a bit of a hole and transferred
spending back to what is now yesterday, what are you going to do? Well,
you’ve got to bring it from the next tomorrow to today and there’s a
limit to how far you can go on doing that,” he added.

King’s comments come at a time when the government has restated its
commitment to fiscal austerity, with its plan A being to ensure fiscal
credibility and to allow monetary policy to deliver stimulus.

King said that the aim of monetary policy in recent years has been
to tackle the extraordinary situation whereby there has been too little
money in the economy rather than the traditional problem of there being
too much.

“The extraordinary thing about the current circumstances is that
there is now too little money in the economy. It’s beginning to rise a
little now, the policy is beginning to work, but it has been very low,”
he said.

-London Bureau; Tel: +44207862 7491; email:drobinson@marketnews.com
wwilkes@marketnews.com

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