Bank of England Governor Mervyn King made a last but strong call for expanding stimulus for the British economy in his final Mansion House speech on Wednesday even as he left some "unfinished business" in the banking sector for the next chief Mark Carney to complete.
King will step down by end-June after ten years at the helm. Carney, former governor of the Bank of Canada, will assume office from July 1.
Though there are "clear signs" that a modest recovery of the UK economy is underway, there is a need to support the recovery as the continued weakness in euro area and problems of British banking system have been acting as a drag on growth, King said at the annual address.
"The greater risk at present is that, over the next few years, unemployment remains unnecessarily high," King said. "It is too soon to say the job of securing recovery is complete. There is a powerful case for more stimulus in the short run," he added.
The departing governor's attempts to relaunch the bond-buying program have been voted down by majority at every monetary policy committee meeting since February this year.
Minutes from the BoE's June MPC meeting showed Wednesday that King, along with policymakers Paul Fisher and David Miles, sought an increase in quantitative easing by GBP 25 billion, while other six members of the committee voted to retain it at GBP 375 billion due to inflation concerns.
Inflation has been above the central bank's 2 percent target for most of the past five years.
"We must be mindful of the risks from injecting more money into the economy," King said. "But our economy has had to absorb an oil price shock on a par with that of the 1970s, as well as a sharp depreciation of sterling."
He said that yet there were few signs of domestically generated inflation, which has remained close to 2 percent. "Pay rises and underlying inflationary pressure are low, and the medium-term outlook is for inflation to fall back to the target," the policymaker said.
He said there is more work to do in reforming the country's banking sector. The authorities must ensure that the country's financial system is truly reformed in a way that reflects the lessons of the
financial crisis.
"We must deal once and for all with the problem of financial institutions that are too big, or too important, to fail," he said, adding that the country can not accept a situation in which taxpayers again have to bear the burden of bank failures.
He said the upcoming Prudential Regulation Authority (PRA) announcement, to be made on Thursday, will make the banking system more resilient and better able to support recovery. "But it is too soon to say that the job is done. Many of our major lenders will still be highly levered."
"There is clearly some way to go before we can claim to have a really well-capitalised banking system," he noted.
King said there is "undoubtedly much unfinished business" for Carney, but felt BoE is in "safe hands."
Carney brings a new generation of leadership to the Bank, as well as enormous experience from his time as a central bank governor and his role in steering the Financial Stability Board, King said.
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