Highlights - New Bank recruit Broadbent quizzed in parliament

LONDON (Reuters) - New Bank of England policymaker Ben Broadbent took questions from parliament's Treasury Committee on Tuesday in a pre-appointment hearing before he assumes his post on the Monetary Policy Committee in June.

Broadbent is replacing arch-hawk Andrew Sentance, whose term on the 9-member MPC will finish at the end of this month.

To read his written testimony to the committee, click on:

here

Below are highlights from the session.

ON HOW HE WOULD HAVE VOTED IN MAY

"I'm not entirely sure. I genuinely don't know. I left my last job a couple of months ago, and I've not followed all the numbers. I really don't know."

ON DIFFERENCE BETWEEN UK AND EURO ZONE STATES

"The single most important difference between us and them (indebted euro zone countries) is that we don't have a fixed exchange rate and that has been the main difference. Monetary flexibility is an important difference.

"What the markets worry about is sustainability. The important considerations are, are the public finances on a sustainable path. And they may be different policies that meet that description."

ON DEFICIT CUTS

(Asked if he still believed the government was on the right course on fiscal policy)

"Yes, broadly speaking. There are always room for slightly different paths, but we faced in 2009/10 as a result of the financial crisis this monumental deficit, unsustainable, and much of that was structural and had to be reduced."

(Asked if he was concerned that the scale of the retrenchment would hurt overall demand)

"I think it does have an impact ... (It) clearly, in my view, has an impact on demand. It may be one of the reasons why growth has slowed a bit over the last few months, it may be."

ON CASE FOR MORE QE

"If the economy were genuinely slower -- that's not my central expectation -- you could think of certain risks, involving a retrenchment of banks, for example. And that might be a reason you would want to engage in more QE.

"But on the central projection, it doesn't look like there's a case for doing that currently."

PAST STERLING FALL NOT DUE TO MONETARY POLICY

"I don't think the big falls in the currency between 2007 and 2008 were driven by monetary policy, but yes, that would be the normal part of the transmission mechanism."

INTEREST RATES CAN'T TACKLE ASSET, CREDIT BUBBLES

"I don't think they (interest rates) are the best way to control identifiable bubbles. I don't think domestic interest rates in a small open economy like ours are really the best way to deal with it. Much of the growth of balance sheets of British banks is related to overseas assets. Domestic monetary policy really couldn't have done much about what happened to those balance sheets, and the credit boom within them."

RISKS TO THE ECONOMY

"The household saving rate is still below levels reached after past recessions. A sudden rise would weaken consumer spending. By draining income and spending power from the UK, higher commodity prices threaten to do the same. To the extent people try to recoup those losses through higher wages, however, rises in commodity prices may also have persistent effects on domestic inflation, beyond their first round impact on the CPI.

"Finally, and although these are smaller than they once were, there are still risks to funding costs from stresses in financial markets, whether at home or among our trading partners in Europe."

MONETARY POLICY FRAMEWORK

"In an inflation targeting framework, monetary policy should -- and already does -- respond to changes in asset prices, at least to the extent they affect demand or signal a change in inflation expectations. I am sceptical, however, that policymakers should aim to do much more than this."

OUTPUT GAP

"According to the latest official estimate, output is more than 10 percent below the level implied by projecting a simple, pre-recession, trend line. But it seems likely that the true degree of slack is significantly smaller than this.

"For one thing, early GDP estimates are prone to revision, sometimes significant, and survey measures of output growth have been quite a bit stronger than recent official estimates."

QUANTITATIVE EASING

(Asked about the impact on the UK economy)

"That too is hard to gauge. Qualitatively, QE is little different from conventional monetary policy -- it's a classical open market operation. Given its scale, it's therefore hard to imagine there's been no impact."

ON WHY CPI ABOVE TARGET

"First, and most importantly, there has been a significant rise in the price of oil and commodity prices. That's been happening for much of the last 7 or 8 years and often the target has been missed for that reason. "That's been the primary thing. This in year particularly, you've also had the rise in VAT. If you strip both those things out, you're a good deal closer to the target."

WHAT SHOULD MPC WORRY ABOUT?

"There are things the MPC should worry about, particularly with regards to commodity prices. It treats these as one-off prices ... and that has been the most important single forecasting error.

"In an environment where the most important parts of the world are consuming commodities, you might do things differently.

"Clearly there's a risk the longer these things go on, the more they become embedded in people's baseline view of what inflation is. But if you look at breakeven inflation rates or the rate of growth of nominal pay, neither of those things to me, sends alarm signals about inflation expectations. And I see no evidence that they have become de-anchored."