LONDON (Reuters) - Bank of England Governor Mervyn King and other policymakers spoke to the British parliament's treasury committee about the central bank's quarterly economic outlook on Tuesday.
Following are highlights of remarks from King, BoE executive director for markets Paul Fisher and external members of the Monetary Policy Committee Paul Fisher, Ben Broadbent and Martin Weale,.
KING COMPLETELY CONFIDENT WITH CARNEY
"I think anyone who holds down a job like mine wants very much on the day when they leave, to hand the Bank on to someone who they know will carry on the good work, and I am completely confident with Mark Carney as someone with whom the Bank is in very good hands - as indeed is the role of governor which I am sure he will carry out with very great distinction.
"It may be unreasonable to expect anything other than a slow and protracted recovery absent a further fall in the real exchange rate. In such an environment, there are limits to the ability of domestic policy to stimulate private sector demand as the economy adjusts to a new equilibrium. In the event that further easing is required, I believe it appropriate to continue with our policy of purchasing gilts."
KING ON REBALANCING STILL NEEDED IN UK
"The underlying problem is one in which there is still a great deal of adjustment to be made in the financial sector, a great deal of adjustment to be made in the economy as a whole - the need for rebalancing - and in this sort of situation, it is very unlikely that we would expect to see a rapid recovery.
KING ON RAPID GROWTH CHANCES
"We have significantly lowered, in our view, the chances of growth being rapid. Now this is something which I think has been building up in our minds over the past year. It's not a sudden change between August and November. I think it was a result of finally realising that, as we had debated among ourselves, the chances of a very rapid expansion of growth - which you might have expected if this was a normal cyclical downturn and then recovery - we do not think the chances of very rapid growth in 2013 and 2014 are very great.
KING ON CHINESE GROWTH
"I think the (BoE) staff probably take a more upbeat view on the prospects of the Chinese economy than I would be inclined to. We've had quite an active to and froing as to why I believe what I do and why they believe what they do."
FISHER ON PERCEPTION BoE SENIOR STAFF NOT OPEN TO ALL IDEAS
"We've frequently put up things we knew might be unpopular because we thought it was the right thing to do. Sometimes they're accepted, sometimes some other decision is made, and I think what we have to address is why the staff have this perception. I think that could be because they don't see the whole of the process. It's a relatively ad hoc process ... One of the ways forward on this might be to have a bit more formality ... whereby we share minutes with more of the staff so they could see the whole of the discussion."
BOE'S KING ON SHARP SHIFT OF TONE
"We made what we thought was a realistic change to our judgments about where the balance of risks lies...
"I think we should have done it earlier and we didn't. I think there are times where you debate something and you finally decide, well look, our judgment really has to change now. And we wanted to make clear that we did not think that the balance of risks was appropriately reflected in previous inflation reports and that we felt that this was a much more accurate reflection of where the committee was coming at.
KING ON MONEY SUPPLY WITHOUT QE
"I do feel, and I would look at this through what has happened to the figures of core money, with the absence of what we had done, I would have expected a contraction in core money and that would have taken us into very serious territory.
KING ON QE AND INFLATION
"In more normal times you might expect that an expansion of reserves would feed through to an expansion of broad money, hence to demand spending and then ultimately inflation. That is not happening at present. If we saw any sign of that happening that would be the moment to make a sharp change to the size of central bank reserves that we have created."
KING ON TOUGH CALL AHEAD ON TIGHTENING POLICY
"The judgment about how much to raise bank rates or how much to engage in asset sales, and the knock-on effect of that on long-term interest rates, will be difficult to gauge in advance and will determine the outcome of policy. So there's a very difficult policy judgment to be made down the road, first as to when we start tightening monetary policy, and then how rapidly we tighten monetary policy. But I don't think it's a debate about how we would do it. But the very difficult judgement which I'm sure my successor will help the committee find the way through, that will be a tough judgment."
FISHER ON QE
"Having been to the States, the evidence I've had there from market contacts is that QE easing seems to be working more strongly now there than it did in the earlier phase- through the similar sorts of portfolio balance channels."
KING: GILT COUPONS PAID TO BOE IS GOVT'S MONEY
"I thought it had no impact at all on the long-run fiscal position and there was no benefit to the taxpayer from making this change. That what you might gain in one year on the published accounts, you would lose on the subsequent year and that view I made very clear.
"But it was their money and it's not for me to say what they should do with their money, or how they publish their accounts."
KING ON COUPON PAYMENT
"Any move of this kind is likely to attract a good deal of cynical comment from our press ... It's very clear ... that this does not give anyone an option. It merely is taking cash in one year with a clear commitment to have to repay it in the next and any impact it has on borrowing this year will be offset by other things being equal a higher borrowing need down the road. It doesn't have any impact on the long-term fiscal position."
KING ON DECISION TO TRANSFER FUNDS
"We accepted that the money belonged to the Treasury and they were entitled to have the money back. Consequences of that in terms of the presentation of the public accounts, and the concerns that you and others have raised -- that it may be a method of misleading people about the public accounts -- is entirely a consequence for the Treasury to face up to. That is not for the Bank ...
"Usually we don't stray into fiscal policy territory. This is about presentation of public accounts, and I do not want to dissuade you from looking into that and raising it with the Treasury, but it is a matter for the Treasury. They are entitled to publish their accounts in the way that they want. And you're entitled to challenge them about whether those accounts are misleading or not."
KING ON THE LIFESPAN OF A CHELSEA FC MANAGER
MP: "On monetary policy you now look as independent as a Chelsea manager. The Chancellor's just wandered in and taken 37 billion and spent it in your field and you've just accepted it.
King: "Few Chelsea managers have managed to last 10 years."
KING ON TREASURY TAKING BOE GILT COUPON MONEY
"I certainly discussed with (Osborne) the consequences that taking the cash now from the Bank to the Treasury would mean additional borrowing down the road and of course, the price that that borrowing would pay would depend on the maturity at which the debt was issued at."
BROADBENT AT NOV MPC MEETING TEMPTED TO VOTE FOR MORE QE
"I went into that meeting, if anything, feeling like I was going to vote for more asset purchases."
KING ON DEBT MATURITY STRUCTURE
"A crucial question which has received far too little attention is what is the right maturity structure of government debt to issue. If you feel you're in a position where interest rates are unusually low for a period that will affect the answer to that important question."
KING ON ARGUMENT THAT PUBLIC WAS MISLED ON MONETARY POLICY
"I think it's unfortunate if people were misled and I think that's a matter for regret, but I don't think it's a very significant point. There was other very important information which the committee had that we could never have released until the inflation data were published the next week... It's always the case that the committee are likely to have or may have information which the rest of the world doesn't have. What they can be assured of is that when the minutes are published all will be revealed and the explanation made fully clear."
WEALE ON INFLATION CONCERNS
"Could I perhaps take that as one of the MPC members who is perhaps slightly more concerned about inflation than the median."
BROADBENT ON WHY HE DIDN'T VOTE FOR MORE QE
"The economy had turned down, the output indicators were pretty weak, in fact, you've never had output indicators and surveys that weak and see policy tightened most of the time, that's been eased.
"There were two things that gave me pause and prevented me, as I saw it, or changed my opinion and made me vote not to increase asset purchases. One was ... that we already had some monetary easing effectively through this coupon transfer. It's fine, I was always free to vote for whatever I thought was appropriate, on top of that, and I don't think comprised my ability to vote for what I believe to be the appropriate conditions one iota. And two, inflation was stronger than we expected and it was stronger for reasons which were likely to persist in the future years. For those two reasons I decided not to vote for more asset purchases."
WEALE ON GILT COUPON TRANSFER
"The economy has looked rather weaker than we might have expected and, in the light of that, some further support for the economy was justified. One obviously can't tune it to precise numbers, but the effects of this transfer seemed to provide the support for the economy that I thought appropriate- all things considered."
KING ON PREPARING MARKET FOR EVENTUAL POLICY TIGHTENING
"When the time comes to tighten policy and to sell assets, this will be a really difficult moment, and it will be very important for the committee to prepare the markets for this decision in order to avoid a very large over-reaction which we saw in the 1990s in the case of the United States when they tried to raise interest rates from a low level after a long period and there was a very big movement at the long end. That's why I said earlier that the challenge - when we get to that point - won't be so much the instruments we use, it'll be the judgment, the preparation, the communication, and that will be a very difficult moment."
WEALE AGREES WITH BROADBENT THAT COUPON DECISION DOES NOT AFFECT BOE INDEPENDENCE
"This decision by the Chancellor doesn't really affect my ability to make decisions that I think are appropriate to bring inflation or keep inflation close to its target. This was one of the things I took into account. The economy has looked rather weaker than we might have expected (and) in the light of that, I thought some further support for the economy was justified. One obviously can't team it to precise numbers, but the effects of this transfer seem to me to provide the support for the economy that I thought appropriate, all things considered."
BROADBENT ON BOE/TREASURY COUPON ANNOUNCEMENT
"It's unfortunate about the timing, but ... then the minutes made everything plain."
FISHER ON POSSIBLE NEED FOR MORE QE
"My disposition still is that we may well need some more easing next year."
FISHER ON WHY HE DID NOT VOTE FOR MORE QE IN NOVEMBER
"The thing that weighed on me in the November meeting was the inflation data. I've been particularly concerned about some of the growing risk of price shocks which do not come from domestic demand - which is where they would come from if it was QE that was underlying it, and that's what held me back from voting for more."
BROADBENT ON WHETHER LOOSE MONETARY POLICY IS KEEPING ZOMBIE COMPANIES ALIVE POINTLESSLY
"It's difficult to say. We see aggregate data; we don't have much information on what's going on under the surface. What is striking is how few companies have gone bust.
"While one wants to keep any company that has a long-term viable future in existence, there may be others who have been kept in existence who do not have a long-term viable future. But that is very difficult for us to know categorically, to distinguish ourselves between one and the other and it is the point of a market economy to decide who survives and who doesn't, frankly. But it is possible, yes."
WEALE - HARD TO BELIEVE ZOMBIE COMPANIES ARE DIVERTING CREDIT FROM MORE VIABLE FIRMS
"I can picture that there are companies going which otherwise would have gone to the wall but in broad terms, in terms of economic performance, we have of course puzzled over the issue of why the supply side of the economy seems weak.
Now the zombie companies, by their nature, presumably aren't those companies which are making a profit. You might think that the mere fact that successful companies are making profits would mean that those are the sorts of company which are in a position to expand and move into new markets and to innovate.
Now I don't have a clear sense of the quantitative effect that people are attributing to zombie companies, but I'd have thought in terms of an explanation as to why the supply side has been weak, it could only be one part of an overall picture."
KING ON ACCURACY OF BANKS' BALANCE SHEETS
"The point you raise is of forbearance... Good forbearance can take place when banks feel 'look, this company does have a long run future, let's not put it in a difficult position now.' Bad forbearance is where the banks don't insist on repayment not because they care about their customer but because they're worried about the implications for their own balance sheet, given the accounting conventions under which banks operate.
"That is undoubtedly a concern, because the issue is - this is the fundamental question we'll come back to on Thursday - to what extent are the balance sheets giving an accurate representation of the underlying position of the banks?"
BROADBENT - DIFFICULTY IN CREDIT MAY BE BEHIND WEAK UK PRODUCTIVITY AND FAILURE TO REBALANCE TOWARDS EXPORTS FASTER
"There is only a finite amount of cheap credit available and if a lot of that cheap credit is being taken up by supporting zombie companies, then it is going to tighten up that supply elsewhere, which is where you need it with perhaps more dynamic companies. So a deeper problem in this, as I see it, is the stability of the banks.
What we don't know is what the real shape of the balance sheet at these banks actually is, and I think it's incredibly important that we get some sort of answer to this.
Stepping back a bit, we've long been puzzled by very low rates of productivity growth and my own feeling is that there's a connection between that slow rate of productivity growth and the slow - or even failure - to rebalance the economy towards the tradeable sector."
(Reporting by UK economics team)
Source: http://news.yahoo.com/boe-officials-speak-parliament-treasury-committee-102807865--business.html
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