King hints at a gentle end to printing money early next year

Bank Governor says loss of output may total £150bn
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The Independent Online

The Bank of England's injection of £200bn directly into the economy – quantitative easing – could be reversed as early as next February, Governor Mervyn King suggested yesterday.

He also said the loss of output in the economy caused by the financial crisis could amount to as much as £150bn, or about 10 per cent of the UK's gross domestic product (GDP).

Mr King called on ministers to "eliminate a large part of the structural deficit" over one parliamentary term in a "credible" programme – a shorter timeframe than is likely to appear in the pre-Budget report on 9 December.

Giving evidence to the House of Lords Economic Affairs Committee, Mr King told peers: "We have a programme of asset purchases which we announced as a programme for three months, so I think there's some presumption that we will take this programme to the end of January and think again at the February Inflation Report and Monetary Policy Committee meeting."

He added: "We can always change our mind and do something earlier if we wish to do that. Certainly in February we'll have another decision to make and we'll make it at that point, with all the information available to hand then."

Another MPC member, Adam Posen, reinforced the idea, saying: "One hopes we are coming to the end of the large-scale quantitative easing exercise."

Mr King and his colleagues have continually stressed that they have an "open mind" on what their next moves on QE will be, but the boost after the meeting of the MPC earlier this month is widely expected to be the last, and marked a deceleration on the pace of purchases of gilts by the Bank.

The committee split three ways and the Bank's chief economist, Spencer Dale, voiced concern about "unwarranted increases in some asset prices that could prove costly to rectify".

Mr King was at pains to point out that risks to the economic recovery remained. In earlier evidence to MPs, Mr King stressed that the level of output seen in the economy at its peak last year would not be seen for some time to come, and suggested the damage from the banking crisis was nearly permanent, putting it at between 5 and 10 per cent of GDP. He added: "The really difficult part is the judgement of when and by how much to tighten monetary policy, and at this stage we can't even rule out doing more asset purchases. That will depend on the state of the economy, so we'll wait until we get there."

Mr King said the economy "continues to face profound challenges" as banks continue to repair their balance sheets and restrict lending.

The constriction of lending is thought to be one factor behind a further sharp drop in industrial investment, announced by the Office for National Statistics. Manufacturing investment fell by another 10 per cent in the third quarter, the ONS reported, and investment in the economy as a whole by 3 per cent.

In a similar vein, the British Bankers' Association reported virtually no gain in the flow of mortgage approvals in October: the count moved up from 42,073 to 42,238. Researchers at the Centre for Economics and Business Research said house prices would "continue to rise for the foreseeable future".

Malcolm Barr, an economist at JP Morgan, added: "With readings on investment and employment trends improving, the data are a significant step in the direction of stabilisation in business behaviour. But the decline over recent quarters has been breathtakingly large, and the turn in UK investment spending is lagging elsewhere."

The Liberal Democrat Treasury spokesman, Vince Cable, will today set out proposals for a National Infrastructure Bank, combining public and private funds. The ONS is expected to revise upwards its GDP growth figure for the third quarter, from a contraction of 0.4 per cent.