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Last Updated: Monday, 16 January 2006, 23:31 GMT
Watch asset prices, King stresses
Mervyn King, Governor of the Bank of England
Mervyn King says low inflation might not always prevail
Policymakers must closely watch the price of assets such as bonds, oil, gold and property to keep inflation in check, Mervyn King has said.

Asset prices had risen sharply in recent years, the Bank of England Governor said, due to the growth in credit and people taking on more risk.

There was a danger that prices could fall or the price of goods and services could rise to match those of assets.

In each case, meeting the Bank's 2% inflation target could be difficult.

Two scenarios

Speaking to a business meeting in Kent, Mr King noted that interest rates on government bonds and other investments were at a historically low level, citing two possible explanations.

One reason could be the increased level of saving worldwide, driven by leading Asian economies such as China.

Our central view remains one of steady growth and low inflation
Mervyn King, Bank of England Governor

The other was consumers' willingness to take on more risk without demanding a higher return on their investment.

Mr King questioned whether either factor was sustainable in the long term, arguing that changes in savings and investment patterns could have a significant impact on interest rates and inflation.

"Monetary policy will, therefore, need to be alert to the information contained in a wide range of asset prices, to be forward looking in its aim of maintaining low and stable inflation and to be ready to respond to changes in the signposts," he said.

Risks

The UK economy had picked up after slowing in the middle of last year, Mr King added.

"Our central view remains one of steady growth and low inflation," he said, before adding that there remained "risks" to this scenario.

He has previously highlighted high oil prices as a danger to economic stability.




SEE ALSO:
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24 Nov 05 |  Business
Bank upbeat on inflation target
16 Nov 05 |  Business
Fuel price rise hits UK inflation
18 Oct 05 |  Business


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