View the article online at http://citywire.co.uk/money/article/a628950
Be patient as QE is no 'manna from heaven', King says
The Bank of England will not sell its assets or give money back to the government, Mervyn King said, as he answered his critics over quantitative easing.
Bank of England governor Mervyn King has said that while printing money is not 'manna from heaven' some of its alternatives are not viable.
During a speech given to the Cardiff Chamber of Commerce, King (pictured) sought to answer some of his critics about the bank's continued use of quantitative easing (QE).
A string of top name fund managers have warned of global central banks' reliance on cheap money. While King said that QE has its uses, he also acknowledged its limitations.
But the Bank governor, due to stand down next year, went on to point out that some of the proposals being put forward are not workable.
'Giving money either to the government or to households directly, or indeed cancelling our holding of gilts, means the Bank of England has no assets to sell when the time comes to tighten monetary policy,' King argued.
He continued: 'When [the] Bank Rate eventually starts to return to a more normal level, as one day it will, the Bank would then have no income, in the form of coupon payments on gilts, to cover the payments of interest on reserves at the Bank of England that we had created.
'The Bank would become insolvent unless it created even more money to finance those interest payments, and that would lead ultimately to uncontrolled inflation. That is a road down which the Bank will not go, and does not need to go. I suspect the advocates of “helicopter money” and related ideas are really talking about a relaxation of fiscal policy. It would be better to be open about that.'
Amid speculation that the Bank of England will extend its existing £375 billion programme when the the monetary policy committee (MPC) meets next month, Kind said the committee would think long and hard about extending its the scheme.
He warned: 'Printing money is not, however, simply manna from heaven. There are no shortcuts to the necessary adjustment in our economy.
'The problems in the world economy mean that we shall have to be patient.'
On Thursday the Office for National Statistics (ONS) will give its update on the state of the economy, and it is expected to announce a rare break from the gloom with the UK exiting the recession during the third quarter.
Retail sales have also picked up, hinting at a tentative recovery in consumer spending.
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