Bank of England governor Mervyn King said during the quarterly media conference to present the Bank's inflation report that Britain's economic recovery faced substantial headwinds.
Following are key comments from the media conference with King and deputy governor Charles Bean, executive director for markets Paul Fisher and chief economist Spencer Dale.
KING ON MOODY'S RATING AND DEFICIT REDUCTION
I think it's a reminder that we are facing a very challenging path to reduce the scale of our deficit so that at some point the ratio of national debt to GDP can start to fall back again, which has to be the objective.
It's an objective which for example, Ben Bernanke in the Federal Reserve has stressed is crucial for the United States. They don't have a long-term plan to achieve that... We do and I think it's very important that we keep to that, we have that plan.
KING ON POTENTIAL GROWTH
We certainly did not change our assessment in that six month period. I think the OBR basically said they thought, again, and decided that the judgement they made in the spring was a wrong one. They changed it in the autumn. I think they are now more pessimistic than we are on that but the fact is that nobody really knows.
It is almost impossible to judge about the amount of potential output in the economy and we should be honest about that.
But I don't think there was any real news in the 6 months between the spring and the autumn to justify.. a change of policy.
KING ON NOT BUYING ALTERNATIVE ASSETS
That would be asking us to buy something that no one else in the economy wanted to buy and that's a definition of a subsidy, essentially.
KING ON INFLATION TARGETING
From our point of view, inflation targeting I think has proved a very helpful framework in which to set monetary policy.
But I do think that the experience of the last four to five years has raised some question marks about what inflation targeting can hope to achieve and whether it is sufficient. And I think our feeling now is that, on its own, it is not sufficient.
It did not prevent the buildup of a large degree of financial instability. There is I think a debate to be had about whether other instruments are the right way to deal with that, through our Financial Policy Committee, or whether monetary policy should take other considerations into account.
BEAN ON INFLATION RISKS
The risks around the target are equally balanced at the forecast horizon.
FISHER ON CHANGES TO ASSET PURCHASE BASKETS
This was a purely operational decision, although made in consultation with the MPC, designed to make sure we can deliver on the MPC's objective which was said back in October of buying along the curve.
We are still buying all the way along the curve in quite a large size,. We don't target any particular maturity but the average maturity we would expect over the next 3 months is broadly in line with the average maturity of gilts in issues. If anything, slightly higher.
KING ON AUTOMATIC STABILISERS
I don't think you should underestimate the impact of the automatic stabilisers.
In this country, the automatic stabilisers are pretty potent, they are large relative to discretionary changes in fiscal policy.
And they are an important part of a framework for fiscal policy that says 'yes' there is clear medium-term plan but the quarter-to-quarter and year-to-year movements in the economy will clearly have an impact on ... the deficit as the automatic stabilisers kick-in. So there is a great deal that is being done.
KING ON REBALANCING:
More than any other advanced economy, we are in the position that we've put in place the conditions that are needed to make that big adjustment. There is a credible medium-term fiscal plan to put our deficit in shape and to get back to a point where the ratio of national debt to GDP can begin to fall back and we have been able successfully to absorb a 25 percent fall in the exchange rate without any rise in wage inflation, in fact wage inflation has fallen, that is something that many people thought was impossible....
Those two things together, it seems to me, should give us confidence that we are going in the right direction but it is a difficult journey and it is impossible to predict the path with any degree of certainty.
Many of many colleagues and peers abroad would very much like to be in a position where they have put those two conditions in place, we have.
KING ON UK BANKS
Relative to many continental banks we have moved a long way in the process of putting our banking system back into a healthier position, in terms of the amount of capital and in terms of therefore the ability of our banks to raise funding from the markets.
KING ON SUPPLY SIDE REFORMS
It is always sensible to introduce supply side reforms that raise productivity - that goes without saying. It is particularly valuable to make supply side reforms in present circumstances.
First, because higher expected future incomes may encourage more spending today and secondly because higher expected future incomes may validate some of the debt that was taken out before the crisis hit and which now looks excessive relative to current incomes.
So that may have an impact on the speed of deleveraging so this is a very good time to look at a range of supply side reforms.
KING ON ASSET PURCHASES
I don't think we believe that as a matter of principle, asset purchases exhibit diminishing returns ... But of course any monetary policy easing -- not just asset purchases, but reductions in interest rates -- can exhibit a limit to how far it can go where there needs to be a significant change in the real equilibrium of the economy.
We looked quite carefully at this number (QE amount) and there are possible explanations relating to the behaviour of the financial sector which mean that it won't carry through till the first or second quarters of this year.
KING ON GREEK DEFAULT RISKS
I don't think anyone can be fully prepared for what will be unforeseeable consequences if such an event (a Greek default) were to occur... Both the government and the (central) bank together - and I am sure the financial sector - have been considering a range of possible outcomes and making contingency plans, but I'm not going to go into detail on that.
KING ON HEADWINDS/DIAMOND JUBILEE:
Although some recent business surveys suggest a brighter picture for activity at the beginning of this year, the fiscal consolidation and tight credit conditions at home and the weakness of our major overseas trading partners are acting as a drag on growth.
The underlying need for repair of balance sheets means that the path of recovery is likely to be slow and uncertain. For much of this year, there is likely to be a zigzag pattern of alternating positive and negative quarterly growth rates reflecting the additional Bank Holiday for the Queen's Diamond Jubilee so that it will be even harder than usual to interpret the official estimates of growth.
KING ON LIMITS TO MONETARY POLICY
Moving to a world of steady growth, inflation close to our 2 percent target and a more normal level of interest rates will take time. There is a limit to what monetary policy can achieve when real adjustments are required.
But with falling inflation and the prospect of an end to the squeeze in real incomes leading to a recovery in growth, we are moving in the right direction.
KING ON RAISING RATES
Unfortunately there is no easy remedy. We all want to return to a world with a more normal level of interest rates but if we were to raise interest rates to such a level now that would serve only to turn a gradual recovery into a recession, put more people out of work and cut the value of assets on which many savers depend.
KING ON OUTLOOK
These remain though challenging times for the UK economy. Substantial headwinds are hampering our recovery and rebalancing.
Today's report explains that further falls in inflation are in prospect as the effect of external factors wanes and a weak near-term growth outlook adds to the margin of slack in the economy.
KING ON OIL PRICES
Disruptions to the supply of oil, for example from Iran or Nigeria, could pose an upside risk to the inflation outlook.
(Reporting by UK bureau)