Highlights from the Bank of England report

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The Independent Online

The Bank of England delivered its latest quarterly inflation and growth forecasts on Wednesday. Below are highlights from the news conference with Governor Mervyn King and other policymakers.

KING ON PROSPECTS FOR SUSTAINED RECOVERY:



"The chance that ... the level of output will be higher in the middle of 2010 is ... no higher than the probability that output will be lower in the middle of 2010. In other words, growth has just as much chance of being positive over the next 12 months as it has of being negative."



"The balance sheet considerations mean that you may well get growth over the next year, that may well happen ... whether that will be sustained depends on the adjustment to balance sheets."



"We may well get a recovery that proves to be sustained, then again we may not. At some point, growth will return to above trend levels in order to absorb the spare capacity that has been created by the very savage fall in output over the past 6 months..."



"There are real risks from the nature of the downturn and the role of the financial sector, that mean this could be a slower return to normal growth paths than we might have expected had this just been a normal business cycle"



QUANTITATIVE EASING:



"We are certainly not disappointed. The exit strategy is very simple - it's a combination of raising bank rate and selling some of the assets we have purchased. We're ready to do that whenever we think it is appropriate to do so."



"What matters is the willingness of the monetary policy committee to do it, I can assure you that every member of the MPC is ready to follow the exit route when it is appropriate to do so."



"No one can know much about the effectiveness so far. We've only seen about 3 weeks worth of data ... It's far too early to judge."



"We were certainly pleased by the initial impact on yields. Of course yields have backed up somewhat since then, but many other things have happened. What's hard to judge is the counterfactual ... I feel these actions are likely to have had some impact."



"It will take 6-9 months I think before we see more evidence."



CORPORATE DEBT PURCHASES



"We buy gilts to make up the difference between the total amount that we want to buy for the purposes of injecting money and the amount that we happen to buy through private sector purchases.



"The objective of buying private sector instruments, whether it is buying commercial paper or corporate bonds is to improve the fuctioning of those markets for corporate credit instruments and to improve their liquidity.



"The aim is to try to increase if we can the private sector issuance of these instruments that can be sold to other private sector participants. I think we have had some success on that."



BANKING SYSTEM



"What we are not seeing is an expansion of lending by UK banks to offset the reduction in capacity. Higher capital would help resolve that, how much higher capital we simply don't know."



"The actions that were taken to deal with the banking system have I think stabilised the banking system ... and removed the panic. These (fiscal) problems are manageable. It's a question of will. There's absolutely no reason for people to talk in dramatic terms at all."



INFLATION, EXIT STRATEGY:



"At present everyone is focused on raising domestic demand in every part of the world economy."



"The immediate issue is not inflation. But of course inflation is a judgement about the currency of each individual country. So it is quite possible to have inflation in a country even if the rest of the world is not suffering from inflation at all."



"We will take whatever steps are necessary to ensure we can try to keep inflation close to (the) target.



"We will not allow a lack of focus on the exit strategy to allow inflation to pick up and move into the stratosphere. We will not allow that to happen."



"What we do know is that we have the policy instruments to hand to ensure that. We know that we can raise Bank Rate. Today we have the problem that we cannot lower it."



PRODUCTIVITY



"The likely impact for the next decade is going to be dominated by recovery from this financial crisis. I don't think the growth of productive potential will be permanently reduced.



"A lot will hinge on how quickly the banking sector gets back to levels of capital that will encourage it to lend on the same terms as before in terms of spreads.



BUDGET:



"It was helpful that the budget was extremely honest and open about the scale of the fiscal problems facing us."



"There certainly seem to us at least as many reasons to suppose that it may turn out to be a smaller deficit than a bigger one."



"There is no doubt that we will need to move back to a path for fiscal sustainability, that is very important."



BUSINESS CYCLE:



"The pace of decline has moderated and a number of indicators are picking up. This is not an artefact of the data."



"This is not like the typical business cycle of the post war period."



To see the entire BOE inflation report click here: bankofengland.co.uk

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