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Saturday 27th of February 2010
February 23, 2010    

Rating agencies should not be concerned about UK’s fiscal position says King

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by Kay Murchie

Mervyn King, the Bank of England’s Governor, has today appeared before the Treasury Select Committee to discuss the latest inflation figures and the issues surrounding the UK’s economy.

Last week, the Office for National Statistics revealed Consumer Price Inflation (CPI) rose to a 14-month high of 3.5% in January, driven by higher petrol costs and the effects of the reduction in the standard rate of VAT.

As a result, Mr King had to write to the Chancellor, Alistair Darling, to explain why inflation had exceeded the Government’s target of 2% and today he gave evidence to the Committee on the latest figures.

In his final appearance before MPs before the general election, Mr King also outlined the political challenges the economy faces.

He said: “The crisis has left us facing many serious challenges. Among them are how to reform the international financial system, how to reduce our largest peacetime fiscal deficit, and how to restructure our banking and financial system to prevent another, more serious, crisis in future.

“The crisis did not originate in the non-financial sectors of the economy but that is where most of the costs are falling,” he said.

Mr King admitted credit ratings agencies are bound to remain ’somewhat uncertain’ about the UK’s fiscal position and that they were looking for a “detailed explanation” of how Britain intended to trim its budget deficit.

However, he said he does not think Britain will lose its triple-A credit rating.

With the budget deficit expected to hit a record high above 12% this year, many have raised concerns that Britain’s credit rating will be downgraded and faces a Greek-style debt crisis.

However, King dismissed this and said there were several differences between Britain and countries like Greece - one being Britain having its own currency.

Mr King also warned that it may be necessary to continue with its quantitative easing (QE) programme. QE, also known as printing money, is a process whereby the Treasury injects funds into the financial system to ease pressure on banks by giving them extra capital.

Earlier this month, the Bank opted to put the brakes on the £200 billion scheme but today the Governor said: “We stand ready to do whatever seems appropriate.”

Following the comments, sterling hit a session low.

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