BoE Governor King said in a speech on Tuesday evening that the economy continued to suffer from a debt overhang and that it was the job of monetary policy "to prevent the deleveraging process from tipping the economy into a renewed severe downturn". He said low short- and long-term interest rates had helped to smooth the balance sheet adjustment and that there was scope for further QE if necessary. We expect the MPC to announce an extension of QE when it meets in February.

Governor King said the economic environment was being shaped by tight credit conditions, higher household saving and a slowing world economy. All three were linked to a realisation that debts were too high relative to incomes, he argued. He said that, in addition to providing monetary support, policymakers had to ensure that the banking system gained in health and competitiveness and that the supply capacity of the economy was improved. Nevertheless, the path to recovery was likely to be "arduous, long and uneven".


source: BarCap