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Tuesday, Bank of England Governor Mervyn King told the Treasury Committee that the central bank is now considering reducing the rate it pays on reserves of financial institutions to encourage lending. This would ultimately channel the fund into the economy.
At a Treasury Committee hearing, he said inflation is likely to be volatile over the coming six months, initially falling further below the 2% target, before rising above the target.
The latest report from the Office for National Statistics showed on Tuesday that annual inflation eased to 1.6% in August, the lowest since January 2005. Inflation held below the 2% target for the third straight month.
King said, "...it will be the outlook for inflation that will guide when and how quickly the MPC raises Bank Rate back towards more normal levels, and when and by how much the assets purchased since March are sold."
He told lawmakers that the asset purchase scheme is having an impact on the broad money and nominal spending.
King assessed that the strength and sustainability of the recovery is highly uncertain and the balance of risks to inflation around the 2% target remains on the downside.
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