February 26, 2013 9:08 am

King defends looser monetary policy

Reuters
BoE governor Mervyn King, left, and his Japanese counterpart Masaaki Shirakawa in Tokyo©Getty

BoE governor Mervyn King, left, and his Japanese counterpart Masaaki Shirakawa in Tokyo

Central banks should conduct monetary policy for domestic reasons and if they follow this rule then global economic growth will accelerate, Bank of England governor Sir Mervyn King said on Tuesday.

Group of Seven countries were in agreement that no country should intervene in foreign exchange or have a specific target for their currency, but that if a country is pursuing policies to boost its domestic economy this could cause the country’s currency to fall, Sir Mervyn said after giving a speech in Tokyo.

Some countries have expressed concerns that aggressive bond purchases by some central banks could push down their currencies and spark a wave of competitive devaluations that could harm global trade.

Sir Mervyn tried to increase government bond purchases by the BoE at its most recent meeting but was voted down, showing that central bankers are struggling with how far they can push unconventional monetary policy.

“Domestic monetary policy should be conducted for domestic reasons, and if we follow this the global economy will accelerate,” he said.

“If a country is pursuing policies to improve the domestic economy, that could push down the currency a bit, but that would lead to increased domestic spending.”

Earlier this month, Group of Seven countries issued a statement saying member countries were committed to conducting monetary policy for their domestic economies and not to target exchange rates.

The statement was issued in response to concerns about the Bank of Japan’s shift to increased government debt purchases, known as quantitative easing, but it raised questions about how far central banks can pursue unconventional policies without harming the global economy.

Minutes from the BoE’s last policy meeting on February 6-7 showed outgoing Sir Mervyn and two others voted for an increase in bond purchases from £375bn to £400bn. Sir Mervyn steps down in June.

The proposal to expand QE was rejected in a 6-3 vote. In the end, policy makers also kept the BoE’s main interest rate at 0.5 per cent.

Policy makers also considered expanding the range of assets they purchased under QE – typically negative for a currency because pumping more money into the economy increases the supply – and cutting interest rates.

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