–Adds Detail To Version Transmitted At 0950 GMT
–King: Prepared To Move Monetary Policy In Either Direction
–Sentance: Time To Ease Off The Accelerator; Policy Setting Extreme
–Miles: Most Likely Outcome Is Inflation Returns To Target

LONDON (MNI) – It’s right for the Bank of England’s Monetary Policy
Committee to keep its foot firmly on the “monetary accelerator” in order
to stimulate the economy, Governor Mervyn King told the Treasury Select
Committee Wednesday.

King also told the TSC that the MPC was facing a difficult
judgement balancing the inflation risks, and it stood ready to move
policy in either direction. The TSC hearing highlighted the divisions on
the MPC, with Andrew Sentance telling the TSC it was time to ease off on
the monetary accelerator and his MPC colleague David Miles making the
case further stimulus may be needed.

Asked if he was arguing that the MPC should take further
stimulative action King said “I am arguing that we have room to use
monetary policy in either direction.”

“I don’t want to prejudge where it (policy) will need to go he
said, adding the MPC was prepared to move policy “in either direction,
as seems appropriate.”

King said setting policy at present was “a very difficult
judgement” and there was “a fine balance of risks.”

Sentance Argues For Reducing Monetary Stimulus, Miles Dovish

MPC member Sentance, who has backed a rate hike, said “The policy
setting we have got at the moment is quite extreme,” with Bank Rate at
an historic low of just 0.5%.

Sentance said four things had changed since the middle of last year
which had caused him to “reassess how hard we need to keep our foot to
the floor.”

These four factors are, firstly, that “the international economy
has turned around more strongly than forecast” and while the recovery is
uneven, the pace of it is much stronger than some such as the IMF were
expecting.

Secondly, “measures of nominal demand have picked up particularly
strongly,” growing at around a 6% annualised rate, with Sentance saying
the UK’s strong Q2 GDP data “confirmed evidence that has been coming at
us from business surveys for some time.”

Thirdly, “the amount of spare capacity that is in the economy is
less, on a various measures … than we were expecting a year ago.”

Fourthly “the inflation outlook has not been the way we anticipated
last year” with inflation “running much higher than we thought.”

Miles, however, highlighted the downside risks as well as the
upside ones that the MPC faces.

“We remain in a pretty difficult situation with monetary policy,”
Miles said.

On the upside risks, Miles said with inflation having been above
target “for an uncomfortably long time now, it may become ingrained into
expectations and it would be difficult to bring down.”

On the downside “There is a risk that the growth we have seen might
dwindle, peter out and the amount of slack in the economy may not fall
back and underlying inflation pressures may fall to a level that takes
inflation beneath the target.”

“The most likely outcome is that inflation, looking through
temporary factors such as the rise in VAT which comes through next year
… is that inflation does fall back to the target,” Miles said.

“I think, on balance, keeping monetary policy at its current very
expansionary setting is the right thing for now,” he said.

In his written evidence to the TSC, Miles made clear he believes
further policy stimulus could be required.

“Recent events in sovereign debt markets and in bank funding
highlight the downside risks. Further asset purchases may be warranted
at some point in the future,” he stated.

King Warns Biggest Risks To UK Come From Outside

King backed Miles’ view that the downside risks to the recovery are
clearly visible and many of the problems lie outside the UK authorities’
control.

“There are clearly downside risks facing the world economy and I
think as far as the UK is concerned the biggest risks that we face are
those coming from outside,” he said.

While the conditions are in place for a rebalancing of the UK
economy “we do need a prosperous euro area for the fall in the effective
exchange rate to sterling to be able to lead to an increase (in
exports).”

King downplayed the impact of the fiscal tightening in the
emergency June Budget, saying “I don’t think it made a significant
difference to whether or not we get what is technically called a double
dip recession.”

BOE Executive Director Markets Paul Fisher also highlighted the
downside risks from the global economy in his written and verbal remarks
to the TSC.

“Upside risks to inflation have remained, or indeed become more
magnified and actual CPI inflation has been higher than we previously
expected. At the same time, downside risks to the global recovery have
increased,” Fisher said in his written testimony.

Asked about the boost sterling depreciation should provide to UK
exports Fisher said “It does take time and the lags are quite
uncertain,” adding “You should be starting to see the effect now.”

BOE Deputy Governor Charles Beans said the impact of the sterling
fall on inflation had been larger than expected.

–London newsroom 0044 20 78627491; email: drobinson@marketnews.com

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