BANK of England governor Sir Mervyn King last night raised the prospect of more money being pumped into the struggling British economy next month.
However, King admitted that, while the £375 billion quantitative easing programme – gilt buying – and historically low interest rates had prevented a depression, it had “caused pain to those dependent on interest income”.
In a speech to the South Wales Chamber of Commerce in Cardiff, the governor said some questioned the room for further asset purchases by the Bank or their likely effectiveness.
“I do not have any concerns on the first point. The quality of gilts [government bonds] in private hands is higher now than when we began our asset purchases, and the government continues to issue new gilts at a rapid rate,” King said.
He suggested monetary stimulus was still needed to help revive pale growth as advanced economies around the world faced a “huge adjustment” in the wake of growing trade deficits and debts, and a collapse of banking systems.
King acknowledged that “the unprecedented degree of monetary loosening” had failed to stop a sharp rise in youth unemployment – now running at more than one in five of 16- to 24-year-olds.
He said that the London Olympics had aimed to inspire a generation, but such was “the scale of the global adjustment required that the generation we hope to inspire may live under its shadow for a long time to come”.
The governor also warned that advanced economies would find it tough to recover without banks taking further likely losses, significant asset writedowns and balance sheet recapitalisations.
“Only then will it be possible to return to a more normal provision of the vital banking services so crucial to an economic recovery,” he added.
“In the 1930s, faced with problems of sovereign and other debt similar to those of today, the pretence that debts could be repaid was maintained for far too long. We must not repeat that mistake.”