Expressing concerns about the developments in the euro area, Bank of England Governor Mervyn King on Tuesday left the door open for an interest rate cut to boost the struggling U.K. economy amid a recession.
"I am particularly concerned because for two years now we have seen the situation in the euro area get worse, the problems have been pushed down the road," he told the Treasury Select Committee on Tuesday.
King's vote for more easing reflected concern about the worsening position in Asia and other emerging markets. "My colleagues in the U.S. are more concerned than they were at the beginning of the year about what is happening in the American economy," he added.
At the June meeting, King along with policymakers David Miles and Adam Posen had called for an increase of GBP 50 billion, while Paul Fisher preferred to boost the stimulus by GBP 25 billion.
King did not rule out the possibility of an interest rate cut. The interest rate has been at the current 0.50 percent level since March 2009.
But policymakers are concerned about the impact of such reduction on smaller building societies, the central bank chief said. Further, he said there is no liquidity trap in the U.K.
Monetary Policy Committee member Miles said that quantitative easing will stimulate the economy more than a rate cut. There is a question mark over whether interest rate reduction would do any good, he said.
Another MPC member Ben Broadbent said, "A good part of the drag on UK activity relates to the problems of the euro area, and it is much less clear that these are abating."
Broadbent refrained from voting for additional stimulus in June as inflation is easing at a slower than expected pace.
"I have been reassured that measures of medium-term inflation expectations in financial markets have, of late, fallen back slightly," he said.
"It is also notable that the price of crude oil has fallen back materially since its peak in early March."
by RTT Staff Writer
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