King told the Treasury Select Committee today the debate on the British economy is still about the need for stimulus, despite second quarter growth estimates of 1.1%.
Economic headwinds mean the country has a “considerable distance to travel” before the BoE base rate could rise to more “normal levels”, he said.
“We must be careful not to read too much into one number”, he told MPs.
To stimulate the economy the Monetary Policy Committee (MPC) must keep its foot “firmly on the accelerator”, he said.
The Committee, which includes King, has voted to keep the base rate at a low of 0.5% for 16 consecutive months, and to continue its £200bn programme of quantitative easing.
“In the months ahead it may be that the MPC judges the inflation outlook warrants pushing down even harder or that we should ease back somewhat.
“The debate is about the appropriate degree of stimulus, not about applying the brakes.”
A rise in the base rate would signal the economic outlook improving in a durable way, he said.
“But I fear there is some considerable distance to travel before we can begin to use the word ‘normal’.”
“Rebalancing” the economy away from consumption towards net exports, while raising the national savings rate will remain Britain’s main challenge, said King.
CPI inflation is currently above target at 3.2%, and has been high for much of the past four years.
King say changes to VAT announced in the Budget mean its is likely inflation will remain above target for much of next year.
“If this high inflation were to become engrained in inflation expectations, it would be difficult to bring inflation back down again”, he said.
However weak consumer spending during this period, with the economy still operating below capacity would push down on inflation, he warned.
“Potentially to a rate that is significantly below the 2% target”, he told MPs.
He said wider, global economic problems, particularly about sovereign debt, underline the fact Britain “cannot be confident” its recovery in demand, output and employment will be sustained.
