UPDATE 1-BoE's King says must face up to monetary policy's limits

(Releads with King's comments from Q&A session)

By David Milliken and Sven Egenter

LONDON, Oct 9 (Reuters) - Monetary policy cannot prop upBritain's economy forever, and export-driven growth will be hardto achieve at a time when much of the rest of the world ispursuinig the same strategy, BoE Governor Mervyn King said onTuesday.

The Bank of England has bought almost 375 billion pounds($600 billion) of government bonds to support the UK economyafter the worst financial crisis since the 1930s, and King saidthere was no immediate barrier to stop it doing more.

But ultimately policymakers could not be "entirely sanguine"about using loose monetary to bring forward economic demandindefinitely, King said in a question and answer session after aspeech at the London School of Economics.

"There is no technical limit on the asset purchases ...(but) I think there is a deeper question about whether there arelimits to what monetary policy as such can do."

King added that the immediate consequence of this for BoEpolicy was not clear, and most economists expect the centralbank to approve more stimulus at November's meeting.

In the past, King has said Britain's economy faces a slowreadjustment to a more export-oriented economy - even if loosemonetary policy can ease some of the pain - and on Tuesday hesaid this was made harder by the fact that other countries weretrying to do the same.

King travels to the International Monetary Fund's annualmeeting in Tokyo on Wednesday, and he said that he wanted tobring up the issue of global imbalances between countries withtrade surpluses and deficits when he was there.

"It's still the case that there are significant imbalances,particularly within the euro area, but also in other parts ofthe world economy," he said. "The strategy of reducing domesticspending and relying more on external demand is facing a realproblem because not everyone can do it at the same time."

In his speech, King also said the current difficultiesresolving Europe's economic problems bore a comparison with thedisputes in the 1920s over German war reparations that was "toopoignant to dwell on".


Most of King's speech focused on inflation targeting andwhether British monetary policy should have been tighter beforethe crisis.

So-called macroprudential regulatory tools - of the typethat the BoE is now getting its hands on - would be the mainline of defence against a future crisis, for example by puttinga limit on banks' leverage, King said. Macroprudentialregulation seeks to prevent a financial crisis by regulating thebanking systems rather than individual banks.

But on their own they may not be enough, and future interestrates may have to be set higher than would be needed purely tokeep inflation close to the bank's 2 percent target, he added.

"It would be sensible to recognise that there may becircumstances in which it is justified to aim off the inflationtarget for a while in order to moderate the risk of financialcrises," King said.

The BoE governor concluded that higher interest rates inBritain would probably not have been enough to prevent thefinancial crisis that hit the country hard.

"Much of this was outside the control of UK policymakers andreflected developments in the world economy," he said.

Some economists and parts of the media have criticised theBank of England for keeping monetary policy too loose in the runup to the crisis, fuelling a credit and house price bubble.

However, financial markets believe the BoE is highlyunlikely to raise interest rates from their record low of 0.5percent before then.

The International Monetary Fund on Monday sharply downgradedits forecasts for the UK economy to a contraction of 0.4 percentthis year and tepid growth of 1.1 percent in 2013, and King saidhe expected "a slow gradual recovery".

A mix of government austerity, the crisis in parts of theeuro zone and an overhang of indebtedness from before the globalfinancial crisis are weighing on Britain's prospects, accordingto the IMF.

($1 = 0.6251 British pounds)

(Reporting by David Milliken and Sven Egenter; Editing byMichael Roddy)

((david.milliken@reuters.com)(+44 20 7542 5109)(ReutersMessaging: david.milliken.thomsonreuters.com@reuters.net))