Mervyn King calls for more action to boost economy

Mr King was speaking to CBI delegates in Belfast

Bank of England Governor Sir Mervyn King has called for further action to boost the UK's ailing economy, in a speech in Belfast.

He said much has been done by the government and the Bank, but more was needed, particularly to restore confidence in banks.

Sir Mervyn said there were signs a "gentle recovery" was under way.

He also defended the Bank's inflation targeting but said to review it given recent events would be sensible.

Sir Mervyn, who steps down from his post in June, said the Bank had allowed inflation to remain above the target 2% rate, as raising interest rates to tackle price rises would have created a deeper recession and pushed up unemployment.

But he said the Bank's current remit did not specify how it should "strike a balance between growth and inflation in the short run".

This, he said, meant there were "certainly aspects of the inflation targeting regime to consider".

His comments come after his successor, the current Bank of Canada Governor Mark Carney, said the Bank's 2% target rate might need be more flexible to allow for higher growth.

'Squeeze'

The main novelty in the speech came in Sir Mervyn King's comments on the Bank's inflation target.

Some, including the man who will replace Sir Mervyn this summer, the Bank of Canada's governor, Mark Carney, have said that the Bank's 2% inflation target might need to be broadened, and made more flexible, to let the Bank be more aggressive in its pursuit of growth.

After 21 years of inflation targets, Sir Mervyn said it was right to consider whether the current framework was up to the job. But he said it would be a mistake to lose the central focus on inflation. Or to expect too much from a simple change of regime.

He said "the challenge we face is not the inadequacy of the framework, but the fact that there is no easy route to recovery after a major banking crisis. Recovery is inevitably slow and protracted. The healing process will take time, and patience is not a quality associated with our political debate".

The chancellor's spokesman said that the governor had made an important contribution to an ongoing debate, but there were no plans to change the framework for setting interest rates.

Speaking to CBI delegates in the Northern Irish capital, Sir Mervyn highlighted how the economic recovery in the UK has been "noticeably slower" than in many other countries.

He said this was largely down to a "deep and protracted squeeze" on many people's real incomes, as inflation outstrips pay rises and energy and food prices increase.

He also highlighted the extent to which UK banks were forced to rein in lending after borrowing too much in the run-up to the financial crisis, and the impact on exports of the eurozone debt crisis.

To combat all this, the Bank has cut interest rates to record lows and pumped £375bn into the economy to try and stimulate demand under the programme known as quantitative easing (QE).

QE was "crucial in avoiding a depression," he said.

In conjunction with the government, the Bank has also made about £60bn available to banks on the condition they lend it on to businesses and individuals.

Higher inflation

But Sir Mervyn said more needed to be done.

"There remains spare capacity - certainly in the labour market," he said.

"So should we do more to revive the patient? The short answer is yes."

He talked of the need to restore confidence in the banking system and to implement reforms to boost investment and spending by companies and individuals.

He also expressed disappointment at higher-than-expected inflation, which stands at 2.7%, but reiterated the Bank's belief that the rate would come back down to its target rate of 2% over the next two years.

Sir Mervyn argued, in the long run, the Bank must maintain its 2% target, as price stability must remain the primary responsibility of all central banks.

He also said low interest rates simply encouraged spending today at the expense of spending tomorrow, and so were not a sustainable way to achieve long-term growth.

Sir Mervyn also pointed to a "gentle [economic] recovery" and some grounds for optimism, such as improving credit conditions and lower mortgage rates, and the fact that companies were sitting on large piles of money.

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