King: More QE could be on cards

Bank of England governor Mervyn King has not ruled out another round of quantitative easing and has reiterated his belief the UK recovery will be choppy.

Speaking at a Treasury Select Committee hearing on financial regulation, King said if economic growth continues to be sluggish the Monetary Policy Committee (MPC) will consider an additional round of quantitative easing beyond the £200bn already committed.

"If we thought sluggish growth was creating the risk inflation would fall below target then we would contemplate further asset purchases," he said.

Last month, the Office for National Statistics said GDP contracted by a worse than expected 0.6% in the final quarter of 2010.

Although King cautions against attaching too much importance to one figure - subject to later revision - he acknowledged there has been a slowdown in growth and warned the recovery will be "choppy".

But he said the bigger picture is the economic recovery is continuing, albeit not at an "exciting rate".

With the economy continuing to slowly gain ground, King said current high levels of inflation will ease off.

The CPI index climbed to 4% in January - double the government's target.

King reiterated the Bank's view the main causes of higher inflation are temporary in nature and says the medium-term outlook forms the basis for Bank of England discussions.

He added the question is not if inflation will come back to target but the speed and extent of that correction.

The governor said rising prices are due to global factors, pointing to surging oil and food prices, and says domestically generated inflation is  around zero.

MPC member Paul Fisher also pointed out the VAT hike to 20% has added 1.5% to CPI compared to a year ago.

Despite King's assertion above-target inflation is a temporary phenomenon, surging oil and commodity prices constitute an area of uncertainty which could present "difficulties", he warned.

The price of oil has recently surged amid the political turmoil in North Africa and the Middle East and King said "a lot will hinge" on what happens to the price of the black gold.

When cross-examined on the relationship between the government and the MPC, King stressed Chancellor George Osborne has never attempted to influence MPC decisions.

Meanwhile, Martin Weale - who called for a 0.25% increase in the base rate in January - says it would not make an "enormous difference" if a quarter point rise was put in place now or later in the year but wanted to "err on the side of caution".

On the subject of a rate increase, King said hiking rates as a "signalling" gesture to the public would be self-defeating, and any increase in the base rate will be done on the basis of solid Bank of England analysis.