Mervyn King speaks at Nottingham CBI dinner

Mervyn King speaks at Nottingham CBI dinner; - In each area of policy it is important that there is a clear framework which guides both the short-term response to the current downturn and the exit strategy when normal conditions return. For monetary policy, the inflation target is that framework. Bank Rate is set to meet our target of 2 per cent for the twelve-month rate of consumer price inflation. For a decade inflation and Bank Rate were remarkably stable. But in only four months, the MPC has cut Bank Rate by 3.5 percentage points to its lowest ever level of 1.5 per cent. - Does this mean we have changed our target? No. We have taken those actions precisely because the sudden downturn in the world and UK economies created a significant risk that inflation would fall below the 2 per cent target. Despite those big cuts, there remains a risk that inflation will fall below 2 per cent. The disruption to the banking system has impaired the effectiveness of our conventional interest rate instrument. And with Bank Rate already at its lowest level in the Bank’s history, it is sensible for the MPC to prepare for the possibility – and I stress that we are not there yet – that it may need to move beyond the conventional instrument of Bank Rate and consider a range of unconventional measures. They would take the form of purchases by the Bank of England of a range of financial assets in order to expand the amount of reserves held by commercial banks and to increase the availability of credit to companies. That should encourage the banking system to expand the supply of broad money by lending to the private sector and also help companies to raise finance from capital markets. - The conventional approach to such unconventional measures is to buy assets, such as government securities or gilts, which are traded in liquid markets to boost the supply of to some extent in Japan earlier in this decade, such asset purchases can increase the supply of broad money and cred...
Mervyn King speaks at Nottingham CBI dinner; - In each area of policy it is important that there is a clear framework which guides both the short-term response to the current downturn and the exit strategy when normal conditions return. For monetary policy, the inflation target is that framework. Bank Rate is set to meet our target of 2 per cent for the twelve-month rate of consumer price inflation. For a decade inflation and Bank Rate were remarkably stable. But in only four months, the MPC has cut Bank Rate by 3.5 percentage points to its lowest ever level of 1.5 per cent. - Does this mean we have changed our target? No. We have taken those actions precisely because the sudden downturn in the world and UK economies created a significant risk that inflation would fall below the 2 per cent target. Despite those big cuts, there remains a risk that inflation will fall below 2 per cent. The disruption to the banking system has impaired the effectiveness of our conventional interest rate instrument. And with Bank Rate already at its lowest level in the Bank’s history, it is sensible for the MPC to prepare for the possibility – and I stress that we are not there yet – that it may need to move beyond the conventional instrument of Bank Rate and consider a range of unconventional measures. They would take the form of purchases by the Bank of England of a range of financial assets in order to expand the amount of reserves held by commercial banks and to increase the availability of credit to companies. That should encourage the banking system to expand the supply of broad money by lending to the private sector and also help companies to raise finance from capital markets. - The conventional approach to such unconventional measures is to buy assets, such as government securities or gilts, which are traded in liquid markets to boost the supply of to some extent in Japan earlier in this decade, such asset purchases can increase the supply of broad money and cred...
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699535138
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ITN
Date created:
January 20, 2009
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00:03:52:18
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ITN
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r20010910_22521.mov