LONDON (Reuters) - The Bank of England’s decision on Thursday to start a second round of quantitative easing was partly prompted by a shortage of money in the economy like that seen in the 1930s, Bank Governor Mervyn King said in a television interview.
King told Sky News that Britain needed the money supply to grow by 5-6 percent a year, rather than its current near-zero rate, for there to be sustainable, low-inflation growth.
“There isn’t enough money in our economy. This is very unusual but it’s happening. It happened in the 1930s and it’s happening now,” he said.
King denied that the Bank’s decision to restart QE -- which pushed sterling to its lowest in over a year versus the dollar -- risked triggering an exchange rate war.
Instead, he said that changes in exchange rate were an important way to help countries adjust to shocks to their competitiveness, and the global economy needed to rebalance as much as the British one.
“The problems ... are originating in the rest of the world, partly in Europe but also partly in the imbalances in the world economy between the East, China and other countries in Asia, and the West, the United States,” King said. “These problems have been with us for 15 years and they have not really been tackled.”
He rejected the idea that the government, whose budget-cutting plan leaves little room for fiscal stimulus -- had pressured the Bank to take action.
But he said that monetary policy was better placed than fiscal policy to react to rapidly changing economic circumstances.
Reporting by David Milliken and Stephen Addison