RTTNews - Governor of the Bank of England, Mervyn King said Wednesday that it is necessary to produce a clear plan showing how prospective deficits would be reduced in the next Parliament session.

In a speech at Mansion House, King said while taking extraordinary steps to stabilize banks and the wider economy, some of the past build up debt was shifted to the public from private sector. The application of temporary fiscal stimulus to counter the downturn last year was correct. But after five years, national debt as a proportion of national income is expected to be more than double its level seen before the crisis. This necessitates a clear plan to cut the prospective deficits.

He said it is too early to reverse the extraordinary policy stimulus injected into the economy through monetary policy, the provision of liquidity support to banks, guarantees of bank funding and fiscal policy. Nevertheless, it is not too early to prepare such exit strategies and to explain how they would work, he stated at the annual gathering in London.

In principle, the challenges faced by the Monetary Policy Committee is straightforward, but it is difficult in practice, King said. With activity returning to more normal levels, inflation outlook would also pick up. Accordingly, the outlook for inflation will guide decisions on the pace and timing of a withdrawal of monetary stimulus.

When appropriate the MPC will raise the Bank Rate and gradually run down its portfolio of assets in a manner consistent with maintaining orderly markets, King said.

According to King, the banking system requires more capital to finance a sustained recovery. Most companies, especially smaller and medium sized enterprises rely heavily on bank finance. King stated, And with current market sentiment it may take further additions to equity capital before the banking system will be able to supply credit at a price and on a scale to finance a sustained recovery. That is likely to take time.

King sees tentative signs that the bank's quantitative easing measure is beginning to support broad money supply growth. He felt the success of the policy is not to be judged by the rise in bank lending, but by the increase in money supply.

King said it is not sensible to permit large banks to combine high street retail banking with risky investment banking or funding strategies, and then provide an implicit state guarantee against failure.

The Chancellor of the Exchequer Alistair Darling said the focus of banks should be on long term wealth creation and not short term profits, and the the process of learning lessons has to start in the boardroom.

Elsewhere, the British Chambers of Commerce slashed its GDP forecast for the U.K. economy. The economy is now expected to shrink 3.8% this year compared to its earlier estimate of a 2.8% contraction. A very small growth of 0.6% is expected for 2010.

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