Bank of England governor Mervyn King testified before the British Treasury Select Committee today in order to defend the central bank’s quantitative easing policy and the its decision to boost the asset purchase facility by £75bn.
Inflation in the UK has been rising and is currently at 5.2 percent, so British Members of Parliament are concerned the latest round of easing will lead to further inflation up further. Than Bank of England target is for inflation to fall below 2 percent next year. The question is will they be able to achieve this?
King’s response to this is was: “We’ll see that some of the large energy price increase and fuel prices drop out. Commodity prices have started to fall back.”
He added “That will carry on until the end of the year, then the increase in gas and electricity tariffs that came in the last couple of months will drop out. These would not be replaced by any “equally large increases in prices”.”
Asked why the bank had chosen not to increase interest rates to bring inflation back to target levels, King said it was in anticipation of these factors.
He explained that if interest rates were increased then inflation would fall way below the target rate of 2 percent, which would not be effective either.
“Any monetary policy easing is going to have the effect of expanding demand, spending, output and ultimately inflation,” King said.
“When we undertook the next round of asset purchases, we did it because we thought there were real risks ahead of inflation falling below the target and we wanted to offset that.”
During the testimony, the governor also revealed the bonds purchased under the new quantitative easing program would begin to mature in 2013 and, if monetary policy has not been tightened by then, the Bank could use the proceeds to buy more assets.