No early return to 'normal' UK rates

London: Bank of England Governor Mervyn King said there may be a "considerable" way to go before UK interest rates return to "normal" as policymakers debate when to start withdrawing emergency stimulus from the economy.

"There will come a point when we will certainly need to ease off the accelerator and return Bank Rate to more normal levels," King told lawmakers in London yesterday. "I look forward to that time because it will probably be a signal that there is a smoother drive ahead, with the economic outlook improving in a durable way. But I fear there is some considerable distance to travel before we can begin to use the word ‘normal'."

Bank of England policy-makers are starting to split on monetary policy as an economic recovery stokes concerns about inflation pressures. While Andrew Sentance argues it's time to raise the benchmark rate from a record low of 0.5 per cent, David Miles said the central bank should be prepared to step up its bond-purchase programme to safeguard growth if necessary.

Downside risk

"Recent events in sovereign debt markets and in bank funding highlight the downside risks," said Miles in written testimony to lawmakers. "Further asset purchases may be warranted at some point in the future."

The central bank bought £200 billion ($311 billion) of government bonds to pump money through markets during the financial crisis.

Bank of England markets director Paul Fisher said at the same hearing that slack in the economy will keep a lid on prices.