Bank of England chief says stimulus still needed

[RSG Admin]

Robert Barr, Associated Press Writer, On Wednesday July 28, 2010, 6:27 am EDT

http://finance.yahoo.com/news/Bank-o...&asset=&ccode=
LONDON (AP) -- The governor of the Bank of England said Wednesday that the need to stimulate the economy still takes precedence over concerns about high inflation at a time when the outlook for the global economy remains uncertain.

Governor Mervyn King told Parliament's Treasury Committee that Britain cannot be confident that a sustained recovery is under way despite last week's report that the economy grew 1.1 percent in the second quarter -- the third quarter of recovery from a deep recession.

"The debate is about the appropriate degree of stimulus, not about applying brakes," King said.

The Bank's Monetary Policy Committee has kept its key interest rate at an all-time low of 0.5 percent, though one member -- Andrew Sentance -- is advocating a hike to 0.75 percent because of his concerns about inflation remaining above the official 2 percent target.

"We continue to face the challenge of rebalancing our economy away from consumption towards net exports, and raising our national savings rate. During the rebalancing, there is a risk that the level of money spending in the U.K. will remain weak, with the economy operating below capacity. That would push down on inflation potentially to a rate that is significantly below the 2 percent target," King said.

He said that consumer price inflation, now 3.2 percent, is likely to stay well above 2 percent through next year, especially since the government plans to raise the broad-based sales tax to 20 percent from the current 17.5 percent. He said there is a risk that expectations of high inflation could become ingrained, and feed continuing price rises.

"The (Monetary Policy Committee) faces a difficult challenge in balancing those risks," King said.

"To do so, we judge that at present it is right to keep our foot firmly on the accelerator in order to stimulate the economy. As you would expect, there is a debate about quite how hard we should be pressing on the accelerator.

"In the months ahead it may be that the MPC judges that the inflation outlook warrants pushing down even harder or that we should ease back somewhat. The debate is about the appropriate degree of stimulus, not about applying the brakes."

King said the economic situation was still far from normal, and that the improvement in credit conditions seen at the start of the year had stopped.

"The key underlying causes of the crisis in terms of the imbalances in global demand have still not been tackled. Those imbalances are likely to be larger this year than last, and will probably still be around three-quarters of their level at the peak immediately prior to the crisis," he said.

Until these underlying problems are resolved, uncertainty about the outlook for the world economy will remain, King said.