Any quotes used must be attributed to Sky News
 

MERVYN KING:

What we decided today was to inject an additional £75 billion of money directly into the economy and we did that because the world economy has slowed substantially in the past two or three months.  America has slowed, China has slowed and of course particularly Europe has slowed and that’s affecting our ability to export, it’s affecting the state of our banks and it threatens our recovery, so that’s why we took action today.

ED CONWAY:

Is this a kind of euro crisis concern or more a UK crisis concern?  Specifically are you worried about the fact that the UK may now be more at risk of recession?

MERVYN KING:

Clearly the impact of the rest of the world on the UK does threaten our recovery, that’s why we took action today to try to head that off.  The problems however are originating in the rest of the world, partly in Europe but also partly in the imbalances in the world economy between the East, China and other countries in Asia and the West, the United States.  These problems have been with us for fifteen years and they have not really been tackled and until we tackle them collectively in the world economy, we won’t get to the underlying roots.  But we’ve done what we can in the United Kingdom.

ED CONWAY:

But specifically in the UK, the last time this was done back in 2009, the UK was in the depths of the worst recession since the 1930s, surely there’s now a concern that that is again a threat that is facing Britain?

MERVYN KING:

I don't know what is going to happen to the world economy and we are not immune to developments in the world economy but what we can do is to take measures at home to try to head off the threat of shocks from overseas and that’s what we’ve done.  We’ve taken pre-emptive action to try to prevent the slowdown from becoming too serious.  Now I don't know what’s going to happen in the rest of the world over the next few months and years and we’ll have to respond and react to what happens.  What I do know is that a rebalancing of the world economy is as necessary as a rebalancing of our own economy.

ED CONWAY:

And what would you say to eurozone policy makers in particular, they seem to be in the spotlight at the moment, they’re facing what people would regard as a crisis in the euro area.  I mean what sort of advice would you give to them?

MERVYN KING:

Well we discuss with them in private things that could be done but what I want to do is try to explain why it is that these problems have become so intractable.  In essence what has happened is over many years some countries have had big trade surpluses and others big trade deficits.  The countries with trade deficits have been spending more than they’ve been earning so they have had to borrow from abroad and they’ve been doing this year after year.  Countries like that are the United States, ourselves and some other countries in Europe.  That cannot go on and there are two ways in which this can come to an end.  Either, and we’re seeing this in some other countries in Europe, if they can’t find new ways to become competitive, then their ability to repay the debts is called into question.  Another way of doing it, which we’ve followed, is that we have a credible plan to repay our debts and the value of sterling has fallen by 25% to make our exports more competitive and attractive to overseas buyers and for it to be more attractive for British consumers to buy from British producers rather than overseas producers.  That is what we have done to put in place a framework to rebalance our economy and I’m sure that’s the right way to do it.

ED CONWAY:

But you mentioned sterling, I mean one of the effects of quantitative easing according to most research is that it does tend to bring sterling down. There are concerns now that the world is facing a new strain of currency wars and some people might say that the Bank of England doing this, more quantitative easing, is going to increase the likelihood of those currency wars.  In fact, just make it actually happen. 

MERVYN KING:

I don't think that’s right and indeed it was precisely the attempt to stop exchange rates moving that has been the source of many of the problems.  If we hadn’t had a fixed exchange rate between China and the United States and Asia and the United States dollar, if we hadn’t had fixed exchange rates within monetary union, perhaps the scale of the imbalances would not have built up to the level that they reached.  Movements in exchange rates are a safety valve which allow these imbalances to unwind gradually and steadily, it’s the natural way that a market economy responds.  If you prevent the market economy from responding in that way, then you know you are going to find difficulties and that’s why within the euro area they are having to find now alternatives to currency movements in order to find ways to improve the competitiveness of those countries in the south that have lost a lot of competitiveness and that’s not going to be easy to do but that’s the challenge that they face.

ED CONWAY:

What would you say to those people who say that this is effectively the Bank of England printing money, they have concerns about this driving up inflation, whether it’s inflation in their pockets or whether it’s inflation of assets around the world, I think a lot of people are really concerned that this policy is building up inflation but not actually necessarily helping them.

MERVYN KING:

Well I understand why they are concerned but let me explain why I don't think they should be.  For most of our lifetimes there has been too much money in the United Kingdom economy, too much money has been printed and injected into the economy and that did push up inflation so inflation has been the major challenge for most of the post-war period. That’s why we ended up with an independent Bank of England to stop it happening. Since the world financial crisis we are now facing the opposite problem, there isn’t enough money in our economy.  This is very unusual but it’s happening, it happened in the 1930s and it’s happening now.  The amount of money in our economy altogether actually fell over the past year and in underlying terms it may be growing at about 2% a year, it needs to grow faster than that.  That’s why we are creating money in our announcement today, to inject more money into the economy, to ensure that the economy can keep growing.  Now I know that people are worried about inflation and I know that inflation, in two weeks’ time we get another inflation number which may well go above 5% but that in our view is the peak and it will then start falling and in the first few months of next year will fall quite rapidly so that the underlying inflationary pressures will disappear during the course of next year.  One of the reasons we took this measure today was that our concern is that the balance of risks now is that inflation – and it may be difficult to imagine today but next year it could well fall and, by the end of the year or in 2013, below the target and that’s why we have taken this measure to keep inflation close to the target once the effect of this measure seeps through to various parts of the economy.

ED CONWAY:

But how can people be sure that we’re not … these are the sorts of policies which in some ways have been tried out in countries like Zimbabwe and the Weimar Republic and in Germany.  How can we be sure that that’s not the same path that we’re heading towards in the UK?

MERVYN KING:

Very simply, because what happened in the Weimar Republic and in Zimbabwe was that the amount of money that was created grew at thousands and hundreds of thousands of percent a year.  It is not growing by thousands of percent a year, it has actually fallen and if we can get back to our underlying growth rate of somewhere around 5 or 6%, we should be able to maintain steady growth with low inflation, so I think what matter is not that people think that we’re creating money, we are but we’re doing it because there’s not enough money in the economy.  Now that may seem unfamiliar to people but it is unfamiliar, that’s because this is the most serious financial crisis we’ve seen at least since the 1930s, if not ever, and we are having to deal with very unusual circumstances but react calmly to this and to do the right thing and the right thing at present was to create some more money to inject into the economy.

ED CONWAY:

You said people aren’t familiar with it, it’s been done before.  We had £200 billion worth of quantitative easing and some people are concerned that that hasn’t necessarily worked.  There are people, for example Andrew Sentance, the former Monetary Policy Committee member, who says that he doesn’t think that more quantitative easing would necessarily do the trick.  I mean how do we know that it is actually working?

MERVYN KING:

Well no one can ever be sure and I respect Andrew’s judgement but people can take different views on this.  The view of the Committee is very clearly and solidly that at present – and you can see from the numbers that the amount of money in the economy is growing too slowly to enable us to sustain a recovery and the world has changed.  Many people thought even three months ago that the issue facing the Committee was when to raise interest rates but the world has changed and so has the right policy response, that’s why today we are expanding the amount of money and I think that is why monetary policy is the right way to take the strain of changes in the world economy.

ED CONWAY:

Some people might look at what the Chancellor, George Osborne, said earlier this week and he was talking about, he was encouraging activist monetary policy and then see that the Bank of England took its decision only a few days later and argue or imply that there has been some kind of pressure applied to the Bank.

MERVYN KING:

Well I can assure you there hasn’t.  Neither any member of this government nor the previous government ever put pressure on the Bank of England to take a monetary policy decision other than the one we wanted to take.  We are nine members of our Committee, each is an individual, each has an individual vote, their votes will be published in ten days’ time and you will be able to see how each person voted and I think it would be pretty amazing if anyone really believed that this was taken as a result of pressure.

ED CONWAY:

Can you rule out ever carrying out more quantitative easing after this £75 billion?

MERVYN KING:

No because we can never rule anything out and I think the great attraction of using monetary policy in these circumstances is that unlike fiscal policy, the government can’t change its spending programmes or plans for the health service up two months and then down again three months later.  We can in monetary policy and as I said, three months ago there was a debate as to whether interest rates should go up, now the debate is about how much asset purchases should take place and indeed that’s a widely expected position in the financial market.  So when the world changes, we change our policy response and monetary policy has the ability to change extremely quickly, that’s its big difference from fiscal policy.

ED CONWAY:

Just one final question: couldn’t you have come up with a better name than quantitative easing?  It sounds like a medical ailment to be honest.

MERVYN KING:

I have never use the phrase that you just expressed and I won’t.  It’s asset purchases but I prefer it very simply to be are we injecting more money into the economy or are we taking money out?  And that’s of course exactly what we do when we change interest rates, this is very similar to a change in interest rates.  We tighten monetary policy, we ease monetary policy.  When we tighten monetary policy we take money out of the economy, when we ease monetary policy we put more money in.  These things can be reversed when it’s appropriate, according to the state of the economy.  That’s why monetary policy is the right policy to deal with present circumstances.