King: low rates to stay 2011.'

Published 13th May 2010

Sterling retreated sharply after the Bank of England hinted rates could stay at historic lows of 0.5pc for at least another year.

Sterling fell 0.8pc against the dollar to $1.48 and lost ground against the euro to trade at 85p after Governor Mervyn King warned Britain faces 'greater downside risks' to the economy.

And he sent an unusually explicit signal that interest rate hikes remain off the agenda given the austerity of deficit-cutting programmes that lie ahead here and abroad.

King said that the Bank would start hiking rates when the economy is strong enough, but 'we are not at that point now'.

He added: 'I don't know when it will come. That's something we will judge month by month.'

Just days after the european Central Bank broke with previous policy by purchasing government debt, King suggested the Boe could recommence its own bond-buying programme.

It would be 'quite wrong' to conclude that the Monetary Policy Committee has ceased purchasing assets after snapping up £200bn of bonds, he said. 'It is an instrument in our armory and it will remain so.'

Unveiling the quarterly Inflation Report, King said the government's top priority must be to tackle Britain's monumental debt burden, amid signs the banking implosion is morphing into a global 'sovereign debt crisis'.

In a departure from custom, he explicitly endorsed the new coalition's policy of rushing through £6bn of cuts this year.

The Greek problems and dangers of contagion in the eurozone underlined the importance of curbing borrowing before market confidence evaporates, he argued.

He said: 'We have seen in the last two weeks particularly, and in the case of Greece the last three months, that it doesn't make sense to run the risk of an adverse market reaction, and to get ahead of that.'

Barclays Capital's Simon Hayes said: 'King emphasised the need for more aggressive fiscal consolidation and indicated that the MPC would be willing to hold monetary policy ultra-loose for a long period in order to facilitate that adjustment.

'We have therefore changed our monetary policy forecast, and now expect monetary tightening to be delayed until the first quarter of 2011.'

Source: ' Daily Mail '

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