Mervyn King faces Treasury select committee on quantitative easing – live
The governor of the Bank of England is being asked questions on quantitative easing – the Bank extended its programme of money printing by £75bn this month 10.57am: So while we seek clarity from the Bank of England about where King is catching a flight to, the main points from that appearance: • A robust and at times irritable defence of QE – both of the first £200bn round and the new £75bn • Without QE the economy would have slowed, but more QE could not be initiated without an assessment of the impact on inflation. The crisis in eurozone eventually forced the MPC’s hand. • A jibe at the government (both the current one and the previous Labour administration) not to put more pressure on the state backed Royal Bank of Scotland and Lloyds Banking Group to lend to SMEs • The new credit easing programme being set up to encourage small business lending should be the responsibility of the Treasury, and hence taxpayers, not the Bank • Confidence that inflation will fall back from 5.2% as the impact of the VAT rise and energy price rises fall away next year • When gilts mature, the Bank might use them to buy more gilts. 10.55am: On this point about SME lending, King is making it clear that the responsibility lies with the Treasury to encourage banks to lend to SMEs. Tyrie is thanking King and Bean for their appearance. 10.48am: King is worrying about his flight… Even so, John Thurso is getting his turn to ask questions. King is stressing that the UK economy is regarded as strong and the credit default swap rate – the cost of buying insurance against default – of the UK is lower than Germany for the first time. King reckons that banks aren’t just restricting credit to SMEs. It is an industry-wide impact from reducing the size of their balance sheets. Michael Fallon asking the questions now. Why not set up a lending agency, as suggested by one of his colleagues on the MPC, Adam Posen, to bolster lending? King is, again, arguing there is no time to set this up. 10.39am: King is explaining that the first tightening of monetary policy could have a “too large” impact on the economy if the moment is not handled carefully. King said I don’t think this unique. It a long history of monetary economics David Ruffley is asking if inflation is having a “crippling effect” on household incomes. I certainly accept what is happening in the economy now is a real squeeze on household incomes. King said the cause of the squeeze is the changes in world prices of energy, consequences of higher VAT, food prices and a fall in the exchange rate that was needed to rebalance the economy. Ruffley wants to know if King feels responsible for this rise in inflation (it is 5.2%) He said that hiking interest rates would have pushed the economy into recession. The key point for us if we had done that and inflation were a little lower, come next year you’d be giving us a hard time for inflation being well below the target. King stresses he is “not at all happy” that inflation is above the 2% target. King is confident inflation will come back down. He cites the impact of the VAT rise will drop out of the comparison. Commodity prices are also falling back – 10 to 20% over the last couple of months after rising 30 to 40% a year. Also, through the next two years the spare capacity in the economy should help to negate any further inflation. King is refusing to score himself between 0 and 10 on his forecasting abilities. 10.35am: Andrea Leadsom MP is asking the questions now and wants to know about the losses that might be made on gilt purchases. King reckons it is irrelevant but says that the time to assess that will be when the government decides to reverse policy – that is by hiking rates. He is saying that the government does not want to hold gilts to maturity. In response to an earlier question about whether the BoE would use the proceeds of matured gilts to buy new assets, King said That’s conceivable. That’s what the Federal Reserve has done with some of its transactions and it’s up to the Monetary Policy Committee at the time to decide. But he stresses the first tightening of monetary policy will be indicated by a rise in interest rates (currently at the historic low of 0.5%). 10.29am: King is stressing that the deterioration in the eurozone became very acute in August. Will the MPC have extra amounts of QE for the future? King said: We will do what is appropriate at the time John Mann, MP, asks was the £75bn figure for new QE “plucked out of the air”. King gets Charlie Bean to answer. He says that assessments were made about a couple of things, including the 1.5% impact on inflation from the £200bn purchases already made. So, inflation will go up another 1.5%? asks Mann. Bean says, no, the extra £75bn will put half a percent on inflation and “somewhat more” than half a percent on GDP. (Inflation is running at 5.2%.) Employment should go up by half a percent too but Bean explains that this is not entirely clear at the moment. 10.24am: MP Stewart Hosie wants to know why the MPC waited to re-launch QE until now. King is saying the concern was about inflation but that these fears are now fading. King adds Wage inflation has remained subdued But he stresses The thing that really made the difference was the change in the outlook for Europe… Hosie is saying there were signs of the economy slowing before the European problems arose. King is again stressing the assessment that needed to be made about inflation. The international picture is highly relevant, said King, as the government is seeking an export-led recovery rather than one driven by domestic consumption. 10.21am: King says he is asked about inflation when he visits SMEs. He also has no doubt that there is a contraction of credit to SMEs. “What we have to do is to find ways to give incentives to existing banks (to lend),” said King. Setting up a bank would take too long – 18 months – to make a difference. Again he mentions the state-backed Lloyds and RBS. The government does of course own two of the biggest lenders in the country. He seems to be implying that the government should be putting more pressure on Lloyds and RBS to lend to SMEs but has not been asked the question directly (yet). 10.18am: King reckons the fall in bank lending would have been worse if the Bank of England had not been embarking on asset purchases. (Interestingly he is avoiding using the phrase QE, instead preferring the technical name of asset purchases.) King points out the state of the banking industry when the QE programme started. Banks had a leverage ratio of 40 to 1 and it now 20 to 1. King said I’d like it go lower The point is, though, that the reduction in the leverage ratio means that banks are likely to be withdrawing loans from the economy. 10.12am: King is stressing again that the bank has not withdrawn from buying commercial paper. King is now being asked how the bank actually buys gilts. He explains a series of auctions are announced, the size of the auction and the gilts that the Bank of England wants to buy. King says It will have an effect on the price on bonds. King is explaining that the Bank does not buy bonds with a maturity of less than three years. King said: The first one we own matures in 2013 It is at that point the Bank needs to decide whether to tighten monetary policy again. Good question about the Bank of England having to potentially sell off the £275bn of gilts it is expected to buy, at the same time the government is trying to issue new debt. King said. No doubt the consequence will be to push down the price of gilts and push interest rates to up. That is one of the consequences of reversing QE, said King. 10.06am: King said: SMEs are too small to find it easy or cost effective to issue large amounts of paper…If you want to help SMEs you need to look at the source from which they obtain financing and that’s the banks. King is now being asked by George Mudie about QE was used so much to buy gilts rather than corporate bonds. King is on the defensive. The issuance of corporate bonds and corporate equity in the period since we started has been at record levels so we have managed to achieve the objective which was to ensure the market was functioning properly. The bank spent £9bn on commercial paper, said King, who is insisting it is hard to spend more on commercial paper. The exchanges are becoming heated and King is adamant that he did not refuse to buy commercial paper. King is adamant The chancellor did not ask us to keep this going indefinitely King said the authorities cannot keep intervening in the commercial paper market. Tyrie steps in and wants to know if the bank will buy more commercial paper if the Treasury asks the Bank to do so. King just said The chancellor has made it very clear he does not believe this is the function of a central bank On whether the effects of more QE on inflation were expected to be small: “Nothing to do with being small. Any monetary policy easing is going to have the effect of expanding demand, output and ultimately inflation… We did it because we thought there were real risks looking ahead of inflation falling below target.” 10.01am: Norman wants to know why there wasn’t more buying of corporate bonds. He wants to know why the government is now doing credit easing – CE – to help small businesses instead. The detail of how CE will work is not yet known and King is making it clear that he does not think CE is a job for the Bank of England. King points out that companies which issue bonds – which might have been able to be swept up by QE – are large, with more than 10,000 employees at least. “It does seem to me that the bank is set up to avoid criticism,” said Norman. King says that is not the case. “What would you have suggest we have done?,” King retorts. Norman says there should have been papers put to government about SMES. “I did give good advice to this government and previous government,” said King. A big dig at Labour from King who he says decided not to use two bailed out banks – Royal Bank of Scotland and Lloyds Banking Group – to bolster lending to SMEs. 9.57am: Jessie Norman now. The asset purchase facility has purchased £205bn of gilts, says King. Norman wants to know about buying corporate bonds, not gilts. King is giving minute details about buying corporate bonds but this is not been done anything on the scale of the purchase of gilts. Previously the Bank has said it has spent £200bn on gilts, so King may be revealing an extra £5bn has been bought as it begins its new phase of QE. 9.55am: King, though, is saying an overall limit on lending should not discriminate against “sectors”. “Having a limit on a the total amount of borrowing does not discriminate against sectors,” King said. Tyrie is asking for more information about what King means by his concerns about discriminating over sectors. What does he mean? When asked to provide information about this, he refuses. 9.50am: So first question is from Andrew Tryie, the chairman of the committee. How did the MPC end up with a majority vote for QE in the space of just a month? The governor says that the decision was very nearly taken in September. Now being asked about “macro prudential tools” which could be given to the Financial Policy Committee – set up inside the Bank of England to look after financial stability – to help take the heat out of financial markets. King says it is up to parliamentarians to decide what powers the FPC should have. One of the items the FPC has suggested is having a power to impose restrictions on loan-to-value of mortgages, for instance. Tyrie wants to know should the Bank have such power over mortgages. King reckons is there is no view yet. “We haven’t made a decision on that yet. We have been asked to give our views on the spring of next year”. This is relevant because King has argued there should not be discrimination against different sectors – yet macro prudential regulation could require this to happen. 9.48am: Andrew Sentance, a former member of the MPC, has posted 10 questions for the committee to ask on his blog 9.45am: Bank of England governor Sir Mervyn King is being questioned over the decision to relaunch quantitative easing by the cross-party Treasury Select Committee. The decision to pump £75bn of fresh electronic money into the economy at the start of October came as King warned that Britain was in the grip of the world’s worst-ever financial crisis. He and deputy governor Charlie Bean will answer questions over the merits of the move given inflation is way above target at 5.2%. Preamble Mervyn King Bank of England Jill Treanor Katie Allen guardian.co.uk
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Mervyn King faces Treasury select committee on quantitative easing – live
The governor of the Bank of England is being asked questions on quantitative easing – the Bank extended its programme of money printing by £75bn this month 10.57am: So while we seek clarity from the Bank of England about where King is catching a flight to, the main points from that appearance: • A robust and at times irritable defence of QE – both of the first £200bn round and the new £75bn • Without QE the economy would have slowed, but more QE could not be initiated without an assessment of the impact on inflation. The crisis in eurozone eventually forced the MPC’s hand. • A jibe at the government (both the current one and the previous Labour administration) not to put more pressure on the state backed Royal Bank of Scotland and Lloyds Banking Group to lend to SMEs • The new credit easing programme being set up to encourage small business lending should be the responsibility of the Treasury, and hence taxpayers, not the Bank • Confidence that inflation will fall back from 5.2% as the impact of the VAT rise and energy price rises fall away next year • When gilts mature, the Bank might use them to buy more gilts. 10.55am: On this point about SME lending, King is making it clear that the responsibility lies with the Treasury to encourage banks to lend to SMEs. Tyrie is thanking King and Bean for their appearance. 10.48am: King is worrying about his flight… Even so, John Thurso is getting his turn to ask questions. King is stressing that the UK economy is regarded as strong and the credit default swap rate – the cost of buying insurance against default – of the UK is lower than Germany for the first time. King reckons that banks aren’t just restricting credit to SMEs. It is an industry-wide impact from reducing the size of their balance sheets. Michael Fallon asking the questions now. Why not set up a lending agency, as suggested by one of his colleagues on the MPC, Adam Posen, to bolster lending? King is, again, arguing there is no time to set this up. 10.39am: King is explaining that the first tightening of monetary policy could have a “too large” impact on the economy if the moment is not handled carefully. King said I don’t think this unique. It a long history of monetary economics David Ruffley is asking if inflation is having a “crippling effect” on household incomes. I certainly accept what is happening in the economy now is a real squeeze on household incomes. King said the cause of the squeeze is the changes in world prices of energy, consequences of higher VAT, food prices and a fall in the exchange rate that was needed to rebalance the economy. Ruffley wants to know if King feels responsible for this rise in inflation (it is 5.2%) He said that hiking interest rates would have pushed the economy into recession. The key point for us if we had done that and inflation were a little lower, come next year you’d be giving us a hard time for inflation being well below the target. King stresses he is “not at all happy” that inflation is above the 2% target. King is confident inflation will come back down. He cites the impact of the VAT rise will drop out of the comparison. Commodity prices are also falling back – 10 to 20% over the last couple of months after rising 30 to 40% a year. Also, through the next two years the spare capacity in the economy should help to negate any further inflation. King is refusing to score himself between 0 and 10 on his forecasting abilities. 10.35am: Andrea Leadsom MP is asking the questions now and wants to know about the losses that might be made on gilt purchases. King reckons it is irrelevant but says that the time to assess that will be when the government decides to reverse policy – that is by hiking rates. He is saying that the government does not want to hold gilts to maturity. In response to an earlier question about whether the BoE would use the proceeds of matured gilts to buy new assets, King said That’s conceivable. That’s what the Federal Reserve has done with some of its transactions and it’s up to the Monetary Policy Committee at the time to decide. But he stresses the first tightening of monetary policy will be indicated by a rise in interest rates (currently at the historic low of 0.5%). 10.29am: King is stressing that the deterioration in the eurozone became very acute in August. Will the MPC have extra amounts of QE for the future? King said: We will do what is appropriate at the time John Mann, MP, asks was the £75bn figure for new QE “plucked out of the air”. King gets Charlie Bean to answer. He says that assessments were made about a couple of things, including the 1.5% impact on inflation from the £200bn purchases already made. So, inflation will go up another 1.5%? asks Mann. Bean says, no, the extra £75bn will put half a percent on inflation and “somewhat more” than half a percent on GDP. (Inflation is running at 5.2%.) Employment should go up by half a percent too but Bean explains that this is not entirely clear at the moment. 10.24am: MP Stewart Hosie wants to know why the MPC waited to re-launch QE until now. King is saying the concern was about inflation but that these fears are now fading. King adds Wage inflation has remained subdued But he stresses The thing that really made the difference was the change in the outlook for Europe… Hosie is saying there were signs of the economy slowing before the European problems arose. King is again stressing the assessment that needed to be made about inflation. The international picture is highly relevant, said King, as the government is seeking an export-led recovery rather than one driven by domestic consumption. 10.21am: King says he is asked about inflation when he visits SMEs. He also has no doubt that there is a contraction of credit to SMEs. “What we have to do is to find ways to give incentives to existing banks (to lend),” said King. Setting up a bank would take too long – 18 months – to make a difference. Again he mentions the state-backed Lloyds and RBS. The government does of course own two of the biggest lenders in the country. He seems to be implying that the government should be putting more pressure on Lloyds and RBS to lend to SMEs but has not been asked the question directly (yet). 10.18am: King reckons the fall in bank lending would have been worse if the Bank of England had not been embarking on asset purchases. (Interestingly he is avoiding using the phrase QE, instead preferring the technical name of asset purchases.) King points out the state of the banking industry when the QE programme started. Banks had a leverage ratio of 40 to 1 and it now 20 to 1. King said I’d like it go lower The point is, though, that the reduction in the leverage ratio means that banks are likely to be withdrawing loans from the economy. 10.12am: King is stressing again that the bank has not withdrawn from buying commercial paper. King is now being asked how the bank actually buys gilts. He explains a series of auctions are announced, the size of the auction and the gilts that the Bank of England wants to buy. King says It will have an effect on the price on bonds. King is explaining that the Bank does not buy bonds with a maturity of less than three years. King said: The first one we own matures in 2013 It is at that point the Bank needs to decide whether to tighten monetary policy again. Good question about the Bank of England having to potentially sell off the £275bn of gilts it is expected to buy, at the same time the government is trying to issue new debt. King said. No doubt the consequence will be to push down the price of gilts and push interest rates to up. That is one of the consequences of reversing QE, said King. 10.06am: King said: SMEs are too small to find it easy or cost effective to issue large amounts of paper…If you want to help SMEs you need to look at the source from which they obtain financing and that’s the banks. King is now being asked by George Mudie about QE was used so much to buy gilts rather than corporate bonds. King is on the defensive. The issuance of corporate bonds and corporate equity in the period since we started has been at record levels so we have managed to achieve the objective which was to ensure the market was functioning properly. The bank spent £9bn on commercial paper, said King, who is insisting it is hard to spend more on commercial paper. The exchanges are becoming heated and King is adamant that he did not refuse to buy commercial paper. King is adamant The chancellor did not ask us to keep this going indefinitely King said the authorities cannot keep intervening in the commercial paper market. Tyrie steps in and wants to know if the bank will buy more commercial paper if the Treasury asks the Bank to do so. King just said The chancellor has made it very clear he does not believe this is the function of a central bank On whether the effects of more QE on inflation were expected to be small: “Nothing to do with being small. Any monetary policy easing is going to have the effect of expanding demand, output and ultimately inflation… We did it because we thought there were real risks looking ahead of inflation falling below target.” 10.01am: Norman wants to know why there wasn’t more buying of corporate bonds. He wants to know why the government is now doing credit easing – CE – to help small businesses instead. The detail of how CE will work is not yet known and King is making it clear that he does not think CE is a job for the Bank of England. King points out that companies which issue bonds – which might have been able to be swept up by QE – are large, with more than 10,000 employees at least. “It does seem to me that the bank is set up to avoid criticism,” said Norman. King says that is not the case. “What would you have suggest we have done?,” King retorts. Norman says there should have been papers put to government about SMES. “I did give good advice to this government and previous government,” said King. A big dig at Labour from King who he says decided not to use two bailed out banks – Royal Bank of Scotland and Lloyds Banking Group – to bolster lending to SMEs. 9.57am: Jessie Norman now. The asset purchase facility has purchased £205bn of gilts, says King. Norman wants to know about buying corporate bonds, not gilts. King is giving minute details about buying corporate bonds but this is not been done anything on the scale of the purchase of gilts. Previously the Bank has said it has spent £200bn on gilts, so King may be revealing an extra £5bn has been bought as it begins its new phase of QE. 9.55am: King, though, is saying an overall limit on lending should not discriminate against “sectors”. “Having a limit on a the total amount of borrowing does not discriminate against sectors,” King said. Tyrie is asking for more information about what King means by his concerns about discriminating over sectors. What does he mean? When asked to provide information about this, he refuses. 9.50am: So first question is from Andrew Tryie, the chairman of the committee. How did the MPC end up with a majority vote for QE in the space of just a month? The governor says that the decision was very nearly taken in September. Now being asked about “macro prudential tools” which could be given to the Financial Policy Committee – set up inside the Bank of England to look after financial stability – to help take the heat out of financial markets. King says it is up to parliamentarians to decide what powers the FPC should have. One of the items the FPC has suggested is having a power to impose restrictions on loan-to-value of mortgages, for instance. Tyrie wants to know should the Bank have such power over mortgages. King reckons is there is no view yet. “We haven’t made a decision on that yet. We have been asked to give our views on the spring of next year”. This is relevant because King has argued there should not be discrimination against different sectors – yet macro prudential regulation could require this to happen. 9.48am: Andrew Sentance, a former member of the MPC, has posted 10 questions for the committee to ask on his blog 9.45am: Bank of England governor Sir Mervyn King is being questioned over the decision to relaunch quantitative easing by the cross-party Treasury Select Committee. The decision to pump £75bn of fresh electronic money into the economy at the start of October came as King warned that Britain was in the grip of the world’s worst-ever financial crisis. He and deputy governor Charlie Bean will answer questions over the merits of the move given inflation is way above target at 5.2%. Preamble Mervyn King Bank of England Jill Treanor Katie Allen guardian.co.uk
Posted by
on October 25, 2011. Filed under News, Politics, World News.
You can follow any responses to this entry through the RSS 2.0.
You can skip to the end and leave a response. Pinging is currently not allowed.