LONDON, July 15 - Following are highlights of Tuesday's testimony to parliament's Treasury Select Committee by Bank of England Governor Mervyn King and new Deputy Governor Rachel Lomax:
Says her main concerns at moment are the current high levels of household debt and the world economy, particularly that of Europe. Lomax: "We are in uncharted territory with inflation at current rates." "I think it would require a major negative demand shock to take us into serious deflation territory." Lomax says she hopes the housing market is cooling off and that prices will grow more slowly in future. Lomax says hopes "world will not notice" when the BoE switches to new economic model. Lomax says the economic forecasting process of the Treasury has always been complicated by political factors. Lomax says it "quite natural" that the Governor should present the inflation report press conference since the report has evolved to take centre stage in recent years.
Lomax says it would be unwise to dismiss the risks of deflation. "It would be unwise to dismiss the risks of deflation, or the possibility that monetary policy might become less effective, as interest rates fall to lower levels." "The scale of current imbalances at least in the U.K. is less marked than it was then," said Lomax, referring to the late 1980s. Says that the change to an inflation target of HICP from RPIX would have "little impact on policy". Adds that the current gap between the two measures would narrow as house price inflation slows. "In recent years the largest source of variation between the two indices has been housing depreciation which affects RPIX but not HICP and which is related to the past house price increases, Lomax told Parliament's Treasury Select Committee. "Looking ahead, this difference is likely to diminish as house price inflation slows," she said. Adds that it is "extremely difficult" to measure housing costs in any measure of inflation.//