Following are key comments by Bank of England policymakers at a Treasury Select Committee hearing on Monday.

Quotes are by Governor Mervyn King unless otherwise stated.



We can draw considerable comfort from the fact that all the indicators that you'd normally look at to see signs of higher inflation expectations, be they nominal wage growth, be they expectations of inflation in the financial markets on yields on gilts and other assets, or indeed direct survey measures of long-term expectations. All of these, I think, fail to show any significant pick-up.

The factors that led inflation to rise over the past year or so are diminishing. And although there is no certainty about the future, I don't think it would be in most people's central view that they would expect a repetition of the rise in energy and food prices we've seen in the past year, or a repetition of the increase in VAT or indeed a repetition of the sharp fall in sterling we saw over three years ago.



I don't know yet what amount of QE we'll actually end up doing ... If we think we need to do more, we will do more.

We are recovering from a recession the likes of which we haven't seen since the Great Depression, we've got a global financial crisis that we've never seen before, we've had this very unusual shift in productivity, apparently, which we can't explain.



We could go faster but the faster we go means that some of our operations don't quite deliver the amount of gilts we want to purchase and there's a certain capacity in the market to buying gilts, depending on how much risk the market may be allowed to take, and we reflect that in the scale of our operations.

I've always said that if we want to go faster, we can go faster but it's more risky the faster you go.



I think it's still going on. I don't think it's as bad here as it is in the euro area economy, where I would say the view amongst my peers is that already in the euro area economy the deleveraging of euro area banks is leading to early signs of a credit crunch, with concerns that it will get worse.


Certainly we need to see the banking system lending more to British non-financial companies. Within that, we need to see lending to SMEs. The difficulty I don't think is (that) the banks are sitting down and being deliberately obstructive in not lending to SME. They are in a position where their own balance sheets are sufficiently weak that people aren't willing to lend to them.


Britain's small and medium enterprises don't have many alternatives to the banking system. Bigger companies have gone around the banks so the average of the biggest industrial companies in Britain can now borrow more cheaply than the average of our six biggest banks. That is a striking fact.

SMEs are not in that position and I think rebalancing is very much linked to the medium-sized enterprises, while future innovation ideas are very much linked to the small-sized enterprises. That sector is very important to the economy.

We estimate the total stop of lending to SMEs to be somewhere between 100 to 150 billion pounds.


The rise in energy, food prices which brought about a squeeze on real take-home pay dampened consumption more than we had expected.

Secondly, now in terms of the problems within the euro area, which should cause renewed concern about the health, not just in the euro area banking system but banking systems right around the industrialised world, which is why this is an issue that all my colleagues in the central bank take seriously and talk to each other about.

And that's raised the cost to banks of obtaining funding and hence in turn the cost of borrowing to companies and households.

These are enormous challenges and it will not be easy to get through this, and there will I think need to be a significant amount of rationalisation of debts and credits in the world before we are finally to emerge from the end of this.

I think we are facing extraordinarily difficult conditions from overseas at precisely the point in our rebalancing when we need growth of overseas to make that rebalancing feasible.


We are very, very uncertain about how much spare capacity there is (in the British economy).


Going forward, we are concerned that problems in the euro area, unless quickly resolved, could lead to weaker outlook for exports than we expected earlier in the year.


Over the last quarter I think all banks have become less safe because our banking system is exposed to the euro area. There is no question about it.

The countries that matter primarily to the UK's banks are Spain and Italy and the exposure is not primarily to sovereign debt, the exposure is to other banks in the euro area and also directly to the real economy in those countries.

If you go back to 2007 I remember that we had regular discussions at the IMF about how the imbalances would unwind in the world economy, and almost all our discussions concluded they were likely to unwind with a significant fall in the U.S. dollar. We didn't conclude that it was likely to unwind with an evident collapse of the banking system.

So I think there are many things that could happen if developments in the euro area get worse and I honestly don't think it makes much sense to pretend that we know precisely know how this will play out.

What we have to do is to be ready and prepared with contingency plans and to make sure that as far as possible that our banking system is as robust as possible to withstand whatever shocks that may come from the euro area from whichever sort or origin they come from.


Well, British banks are much better capitalised than they were in 2007-2008. They are also much better capitalised than many banks in the continent and the euro area.

When the European Banking Association published its estimates with the amount of capital which European banks would need to obtain over the next six months they allocated the numbers by country. Many countries in the euro area, the EBA argued, required large amounts of capital be injected into their banks.

The EBA thought the appropriate number for the UK was actually zero. So they didn't recommend that more capital was injected into the UK system.

Clearly, other things being equal, the more capital a banking system has the better able it is to withstand shocks that come and I think none us can really know the scale of shocks that could come from the euro area and no banking system can withstand shocks that are sufficiently large, so there is certainly no room for complacency here.


I think it is very hard to give a worst-case scenario from that, many things could happen and an awful lot will depend on the politics of it.

I am not sure it is terribly sensible to consider the worst-case scenario.

What I would say more generally is that what we are facing is a situation in which some painful adjustments need to be made.

And those painful adjustments will need to be made both for creditors and debtor countries and those painful adjustments will need to be made irrespective of how the euro crisis plays out and so there is no easy way out of this.

Maybe others would like to comment but for me I don't see much point trying to speculate on the worst case.

As we said in the report, the more extreme events associated with developments in the euro area and the sovereign defaults that come under that category are not something we have tried to quantify because they will depend critically on market responses to it, which will depend ultimately on whether people believe that the solution put forward is politically sustainable or not.


Let me not base it on one economy, let me make a more general statement which is that underlying this problem is a current account imbalance. Many economies in the south including Greece have large trade deficits and the question is how can they get back to a point when these can be financed and ultimately the debt serviced?

What we're seeing is that the private sector since the summer has indicated pretty clearly that it doesn't want to finance these current account deficits. That's left governments to finance the deficits, primarily the euro area governments.

Given the scale of the debts which are being built up to the rest of the world in some of the periphery countries, it's very hard to see how just further loans to those countries will actually resolve the problem.

They have to find a way of regaining competitiveness during a transition period. While they're doing that, those current account deficits will need to be funded I suspect by transfer rather than by loans and I think what markets are looking for is a clear signal from other governments in the euro area that they're willing to provide the transfers.


This is clearly not the time to raise capital requirements. I totally accept and they are not being raised, it has been announced that they will go up in years to come.

The pressure on bank balance sheets now is not from what the regulators are doing but from the realisation in the market how risky balance sheets of banks actually are.

Before 2007 people who lent money to banks did so in their world of innocence where they thought it was completely safe to lend particularly to big banks that they will always be repaid or bailed out so they were willing to lend to banks at interest rates only a few basis points above bank rates.

Now people realise how exposed the balance sheets of all banks around the world are to what is going on in the euro area.

I think there is an issue about liquidity requirements and whether at present the liquidity regulation is coming in too quickly. That is an issue that we are considering on the financial policy committee.

On the liquidity side there is an issue to be discussed, not on the capital side where I think market pressure means that the banks that can reveal that they have strong balance sheets and a lot of capital will be able to attain funding.

And I think ... actually this is a world where transparency about banks balance sheets will serve them very well, we see that in the euro area.

If a bank can reveal that its exposures to self-evidently risky assets are lower than the market expected then they will benefit from that.


We're not in a position now where broad money is falling and I think that is a success of policy and it would have been worse had actions not been taken and I think if we had not done asset purchases broad money would be much weaker than it is now.

The other side is that we are still deep in a financial crisis with weak output and we're a long way from getting back to normal.

When we do get back to normal Ben (Broadbent) says full money growth will return to normal historical rates. So it's not as high as I would wish but it's a lot higher than one might fear given what's going on in the world.



In an environment in which the banks remain under pressure, their own funding remains under pressure, I don't think it was ever going to be the case that the main effect of QE was directly via the banking system. Instead, I think it's been operating largely via the decisions of the non-banks from whom asset purchases are made and what they subsequently do with the proceeds of gilt sales. So I don't think one should look at broad money or credit growth for the effects of QE.



... we have seen steep falls in consumption and recently to attribute a loss of that over the last year or two to very weak real income growth.

It is a result of hits to, well one is VAT, but more importantly to energy prices and indeed to weak productivity.

Looking ahead, that is one relatively bright aspect of the projections as long as we don't get increases in those costs on the scale we have seen over the last year or two, and it is hard to see them on that scale, then real income growth and consumption growth too will improve.

Whether that means growth in the economy overall improves to the same extent is harder to say in the face of these other headwinds.

And the troubles in the euro zone, it is more likely they will show up in other areas of demand, in exports, investment and so on rather than consumption so I wouldn't want to hang the fortunes of the economy entirely on household spending growth.



We do certainly know -- and this happened in Japan -- that countries can have periods of rather poor productivity performance. I certainly wouldn't say that that sort of thing couldn't happen here, but I've no reason to believe that it's likely to happen.

There is no reason to think that underlying trend growth rates have deteriorated markedly.

(Reporting by London bureau)