The Governor of the Bank of England defended the Monetary Policy Committee’s (MPC) decision to introduce a further round of quantitative easing (QE) in a speech in Liverpool yesterday.
Sir Mervyn King said that the problems in the eurozone meant the UK recovery has fallen off track. Sir Mervyn said that the resumption of QE was justified because it will now take longer to return the economy, public finances and interest rates back to normal levels.
He made his speech on the same day that the consumer prices index (CPI) reached its highest level for three years, increasing from 4.5 per cent to 5.2 per cent. The retail prices index (RPI) reached a 20-year high of 5.6 per cent.
The effect of high inflation will further weaken the public finances as well as household spending as the cost of essential food and heating increases and outpaces wage increases. The September measure of inflation is the one used as a basis for benefits and pension payments from April 2012 onwards.
The Institute for Fiscal Studies estimates that the increased cost of social security payments will cost the Treasury £1.5 billion and with additional costs on index-linked costs will add a similar amount to the outgoings of the public purse. This will make it more difficult for the chancellor, George Osborne to reach his austerity targets.
Sir Mervyn said that QE was justified because underlying inflation, if the effect of the energy price rises, import prices and tax increases were stripped away, was subdued. He reiterated that he expects inflation to fall back sharply in 2012.
He called on China, Germany and Japan to introduce policies that stimulated economic growth and to import more from countries running trade deficits. He said that each of these countries had large trade surpluses and should increase spending so that countries with a deficit such as the UK and the United States could grow through export trading.
Mr King said: "Four years after the financial crisis began, the foreign exchange reserve holdings of China are substantially larger than at the onset of the crisis."
"Countries have responsibilities to each other, and we need to work with our partners overseas to find a solution to present problems," he added.
Source: www.myfinances.co.uk
Sir Mervyn King said that the problems in the eurozone meant the UK recovery has fallen off track. Sir Mervyn said that the resumption of QE was justified because it will now take longer to return the economy, public finances and interest rates back to normal levels.
He made his speech on the same day that the consumer prices index (CPI) reached its highest level for three years, increasing from 4.5 per cent to 5.2 per cent. The retail prices index (RPI) reached a 20-year high of 5.6 per cent.
The effect of high inflation will further weaken the public finances as well as household spending as the cost of essential food and heating increases and outpaces wage increases. The September measure of inflation is the one used as a basis for benefits and pension payments from April 2012 onwards.
The Institute for Fiscal Studies estimates that the increased cost of social security payments will cost the Treasury £1.5 billion and with additional costs on index-linked costs will add a similar amount to the outgoings of the public purse. This will make it more difficult for the chancellor, George Osborne to reach his austerity targets.
Sir Mervyn said that QE was justified because underlying inflation, if the effect of the energy price rises, import prices and tax increases were stripped away, was subdued. He reiterated that he expects inflation to fall back sharply in 2012.
He called on China, Germany and Japan to introduce policies that stimulated economic growth and to import more from countries running trade deficits. He said that each of these countries had large trade surpluses and should increase spending so that countries with a deficit such as the UK and the United States could grow through export trading.
Mr King said: "Four years after the financial crisis began, the foreign exchange reserve holdings of China are substantially larger than at the onset of the crisis."
"Countries have responsibilities to each other, and we need to work with our partners overseas to find a solution to present problems," he added.
Source: www.myfinances.co.uk
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