Bank of England Governor Mervyn King set out the bank’s stimulus and interest rate exit strategy on Wednesday, in preparation of an economic turnaround and higher inflation.
“When appropriate the MPC will raise (interest rates) and gradually run down its portfolio of assets in a manner consistent with maintaining orderly markets,” King said during a speech at London’s Mansion House.
Higher interest rates and a withdrawal of fiscal stimulus were the “simple” tools at the bank’s disposal, he added.
King said there were “solid reasons” for thinking that a recovery in economic activity was likely to occur at some point this year. But as the economy recovers, the inflation outlook will rise too, he said.
The BoE slashed interest rates to an all-time low of 0.5 percent as the global recession took hold in the UK. But inflation has remained stubbornly above the bank’s own inflation target of 2 percent.
“It is the outlook for inflation that will guide decisions on the pace and timing of a withdrawal of monetary stimulus,” King said.
“Reaching judgments on the outlook for inflation is never easy … in contrast, the choice of instruments is simple,” he said.
Even as King set out his strategy for tackling inflation, he said that the path to recovery could be protracted and that it is too soon to reverse the fiscal stimulus injected into the UK economy.