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October 19, 2009

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Financial system yet to recover: UK official

THE Bank of England must continue its policy of quantitative easing (QE) because the financial system has yet to recover fully, United Kingdom Monetary Policy Committee member Adam Posen said yesterday.

He told the Sunday Times that regulators should consider limiting the size of banks to avoid a repeat of the credit crisis.

Posen said the central bank would base its decision on whether to extend QE, a tool used to increase the money supply by buying government or other securities from the market, on inflation and the extent of the economic recovery.

"It goes back to how much you think there is real overshooting and inflation risk, and how much you think the financial system has recovered," he was quoted as saying.

"My answer to the first is that I am not worried about overshooting inflation right now. The answer to the second is that we will have a forecasting round and we will decide.

'Not there yet'

"My personal view is that if you look at the things we are looking at ... we are not there yet."

Britain's central bank has cut interest rates to a record low of 0.5 percent and embarked on a 175 billion pounds (US$284 billion) quantitative easing program, in order to kick-start growth. It will announce on November 5 if it will extend the program.

Posen, who replaced Timothy Besley on the bank's rate-setting committee last month, voted in September to stick with the 175 billion pound plan rather than raising it to 200 billion pounds.

In the Sunday Times interview, Posen echoed Bank of England Deputy Governor Charles Bean's comments last week that Britain's economy had probably hit bottom.

"The Bank and the government - and other leading governments and central banks - have pulled us back from the brink and ruled out the worst possible outcomes," Posen said. "Now we are back to coping with a normal recession.

"It is pretty severe but we are five quarters in and it looks like we are bottoming out."


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