Sterling's fall against major currencies is helping a much-needed rebalancing of the British economy towards exports, Bank of England Governor Mervyn King said in an interview published on Thursday.
King's remarks pushed sterling to a five-month low against the euro, coming as they did after its slide last week — though he has previously made similar remarks.
"The fall in the exchange rate that we have seen will be helpful to that process but there's no doubt that what we need to see now is a shift of resources into net exports — whether directly or in producing things that compete with imports," he told The Journal, a regional newspaper based in Newcastle.
Sterling, which has fallen by almost a quarter against other major currencies in the past two years, was also hit on Thursday by a media report characterising as a crisis meeting an upcoming BoE seminar for economists on the progress of its quantitative easing (QE) policy.
King said Britain's economy was showing signs of recovery, but any upturn was likely to be small compared to the plunge in output caused by the world financial crisis — broadly in line with his parliamentary testimony last week.
"Output has stabilised," he said. "There are some signs that growth may be beginning to pick up. But we shouldn't get too carried away by this. This is clearly very small growth after a very large fall and unemployment has risen so it's a difficult challenge ahead."
He declined to comment specifically on Confederation of British Industry forecast for growth of just 0.1 percent in the first three months of next year.
"How rapidly growth will pick up — whether it will be plus a little bit in one quarter, minus a bit in another — I don't think is the big picture at all," he said.
"I think the UK is pretty well set for a recovery but the banking sector is not in good shape and it will take a long time before the balance sheets of the banks are fully repaired," he added.
Economists saw King's comments as confirmation the BoE will keep interest rates at a record-low 0.5 percent for an extended period and possibly expand its 175 billion pound QE policy.
"Mr. King's caution over longer-term growth prospects reinforce belief that he will be in no hurry at all to withdraw any of the stimulative measures that have been enacted by the Bank of England," said Howard Archer, chief UK economist at IHS Global Insight.
"They also suggest that he believes that further measures could yet be warranted to support and encourage bank lending," Archer added.
FINANCIAL REGULATION
King said future financial regulation must ensure banks did not take too many risks while enjoying an implicit or explicit guarantee from the taxpayer.
Diplomatic sources have said the central bank governor may take a senior role on a new European Union financial stability watchdog alongside his BoE job, but King declined to comment.
"I have been involved in no discussions on that whatsoever," he said.
King also told businesses in the northeast that Britain needed a credible plan to reduce its budget deficit, the Northern Echo newspaper reported.
"We need an announcement of a plan that the financial markets will believe. The pace of that plan will depend on the pace with which the economy recovers, but it needs to be a plan for within the term of (one) Parliament," he added.
Britain faces a national election by June, and how the national accounts should be balanced is a key issue of contention between the opposition Conservatives, who lead opinion polls, and Prime Minister Gordon Brown's Labour Party.
King has repeatedly said Britain will need to rein in its ballooning budget deficit, but shied away from setting a precise timetable or highlighting areas where cuts should be made. * For a full copy of the Journal interview, see www.journallive.co.uk
