Highlights - Bank policymakers before Treasury Committee

The Bank of England is seen between pillars in the City of London April 11, 2011.

LONDON (Reuters) - Bank of England Governor Mervyn King and other members of the Monetary Policy Committee gave evidence to parliament's cross-party Treasury Committee on Tuesday.

Following are highlights from their testimony.

TUCKER: MPC NOT DRIFTING Towards MORE STIMULUS

"I certainly don't think it (the BIS calls to raise rates) should just be cast aside. This is not a committee that's drifting towards thinking that more stimulus may be needed.

The threshold for me (for more stimulus) is high. I'm one of those that is worried about an upward drift in inflation expectations. The longer that inflation remains so high, and we say it's due to another one-off factor, the more the people of this country think we use this "one-off factor" in a completely different way.

"The economy has turned out softer this year than I would have expected.

"The longer the weakness persists the more likely it is the supply capacity of the economy becomes eroded. We could find ourselves in circumstances where upward pressure on inflation doesn't come from strong growth but comes from weak supply."

"The big thing is that the forces buffeting this economy are frankly all over the place, making it very difficult to predict ... the only thing we must be determined about is that people don't lose their faith in us to keep inflation down."

MILES ON RISKS FROM EURO ZONE

"There are a whole range of risks to demand and output in the UK. One of the big ones at the moment, as we've already discussed this morning, is what is happening on the periphery of the euro zone. Who knows how that will play out. Clearly there is the possibility it plays out badly and there is a negative knock-on impact on demand in the UK."

MILES ON HOUSE PRICES

"I'm sceptical as to whether one would expect the level of house prices relative to people's income would return to some level in the past.

"One thing we should expect is the level of owner-occupation in the UK might move back to a lower level than we've seen a few years ago. I don't see that as a bad thing, not a sign that the market isn't working properly."

MILES ON SENSITIVITY TO RATE RISES

"It's certainly true that he total amount of household debt relative to size of the economy is significantly larger than it was 20 years ago.

"That in itself would suggest that sensitivity to a change in interest rates and mortgage rates in particular would be a little bit higher.

"I'm not so pessimistic about the risk that arrears and repossessions move up sharply. "

DALE ON CONSUMPTION

"The broad pattern is that consumption is weaker and that may well continue. The fact we may see very weak consumption growth over the next year or so I do think is likely."

KING ON QE

"I regard QE as a perfectly conventional monetary policy tool. This is something we can do. I think it's of particular relevance when rates are low.

"If we feel there is a threat to inflation caused by easing policy then we won't do it."

MILES ON RISKS FROM EURO ZONE

"There are a whole range of risks to demand and output in the UK. One of the big ones at the moment, as we've already discussed this morning, is what is happening on the periphery of the euro zone. Who knows how that will play out. Clearly there is the possibility it plays out badly and there is a negative knock-on impact on demand in the UK."

POSEN ON LIQUDITY PROVISION, SMES

"I am fully confident that the system we have in place to provide emergency liquidity is a huge improvement over what we had in 2007/08.

"The SME sector in the UK is particularly vulnerable to a banking crisis.

"If there were to be a financial problem in the euro area or in the U.S. banks, that would probably reduce liquidity for SMEs in this country and that is serious about employment, investment, inflation. It's difficult to imagine, all else being equal, inflation going up in that environment."

KING ON UNWINDING QE

"We'd make the first move on bank rate then we would debate the merit of unwinding the asset purchases."

KING ON DIFFERENCES ON MPC

"The differences among members of the committee are easy to exaggerate. After all the differences range only from whether rates should rise by a quarter of a percentage point now to whether there should be an extra 50 billion pounds of asset purchases."

KING ON REMIT

"Our remit does allow for us not to try to bring inflation back to the target immediately if that would lead to undesirable volatility in output. And I think most of us on the committee have taken the view that to tighten policy now would risk that."

KING ON INFLATION EXPECTATIONS

"You would normally expect that the circumstances in which inflation expectations would pick up would be ones in which people felt there was a tighter labour market, and it was more likely that domestic prices would be put up.

"What we see at present is an unusual combination, and a very unattractive one, in which domestic wages and prices are not really rising, but that prices which are reflecting costs of goods imported from overseas, or tax changes, energy prices from the rest of the world, utility prices -- are leading there to be a significant wedge between what you would think of as domestically-generated inflation and the level of CPI."

POSEN ON WHY MORE QE IS NEEDED

"I expect inflation to be below target. Again there will be a spread of things around it. On the assumption that energy prices only go up a little and that something terrible happens in the euro area, my belief is inflation will be well below target this time next year and two years out.

"(My assumption is) first that consumption would be weaker than the MPC's modal forecast, and consumption has indeed been weak. Second that wage increases would be weak, that, again has turned out to be the case. Third, my biggest difference with other members on the MPC, is I do not believe that long- term inflation expectations in financial markets and wage setting are moving in response to previous misses (of the CPI target). If you put together those three things: then it seems to be that the policy is insufficiently stimulative and we should be doing more."

MILES ON CPI EXPECTATIONS

"I don't look at those (inflation expectation) surveys and say here is a clear sign that people have lose faith that inflation will ever come back to the target.

"Inflation over the next two years starting from now, on our own forecasts, for much of that period we ourselves think the most likely outcome is inflation will stay markedly above the target level."

"The key thing here is, is there evidence that looking further down the road, households clearly believe inflation will not come back down to target at any time? I don't think that's the case."

POSEN ON CPI EXPECTATIONS

"The household expectations measures are signs of concerns and experience by households, but they're not a good forecast about what's going to happen.

"When we talk about expectations being deanchored, we're talking about exchange rates and gilt markets and they are not (deanchored here).

"People in markets and people in professional forecasting broadly understood why we're doing it. "There is absolutely no sign of that (higher wage demands) in the UK economy right now."

KING ON WEAK CONSUMER SPENDING, BANK SPREADS

"We expect to see relatively weak consumer spending. The fall in house prices has come back a bit, activity is very weak. But the number of repossessions is way down from what we saw in the early 1990s.

"The reason we would raise interest rates would be in the context of a much stronger economy with unemployment falling rather than rising. It should also be the case that the interest rates that borrowers face should not rise as fast as the rise in bank rate.

"Along with the path of an increase in the bank rate -- which inevitably will come from where we are now back to more normal levels -- you would expect that to be accompanied by a process in which the spread between the bank rate and (rates banks charge) would not go back to the low rate where they once were, but would undoubtedly narrow."

KING ON NEED FOR TRANSPARENCY ABOUT GREEK EXPOSURE

" I certainly think that in present circumstances more transparency about sovereign exposures would help.

"That can do a great deal to help fin markets evaluate where the risks are.

"What can be done is to be transparent about the facts, then financial institutions can make their own judgement."

KING ON PREPARING FOR GREEK DEFAULT

"What we're doing is to say there is sufficient concern in the market about the possibility of (a Greek) default for us to think about contingency plans and the consequences of this event."

(Reporting by Fiona Shaikh)