By Padraic Halpin and David Milliken
BELFAST, Jan 22 (Reuters) - The Bank of England'sinflation-targeting remit needs to be fine-tuned but should notundergo fundamental change, central bank governor Mervyn Kingsaid in a wide-ranging speech on Tuesday.
King also said the central bank was ready to restart bondpurchases or cut interest rates if needed to boost the economy,but that Britain needed more fundamental reforms if it was toexceed the "gentle recovery" which he expects for 2013.
King steps down in June, and his successor Mark Carney, whocurrently heads the Bank of Canada, has promoted long-termcommitments to low rates - which are also in favour at the U.S.Federal Reserve - as well as discussing the merits of targetingthe size of the economy in cash terms instead of inflation.
To date the Bank of England has been unenthusiastic aboutexplicit interest rate commitments - arguing its existing policyframework is clearer than other central banks'.
And finance minister George Osborne, who ultimately decidesthe bank's goals, said last month that while he welcomed debate,there would need to be a strong case for change.
However, in what is likely to be his last speech outsideLondon, King told members of Belfast's business community thatit was time for the BoE and the government to think again.
"Recent actions by central banks and governments in a numberof industrialised countries have raised questions about theframeworks within which monetary policy is being conducted," hesaid.
"In the UK, the inflation target was introduced almost 21years ago, and it has now come of age. It would be sensible toreview the arrangements for setting monetary policy," hecontinued at the Confederation of British Industry event.
The changes King appears to have in mind are relativelysmall. In the speech, a text of which was provided by hisoffice, King said Osborne may want to be more explicit about howfast the central bank is expected to return inflation to target.
Inflation has been above its 2 percent goal since December2009, and King said he expected it to remain so for most of2013. The central bank's forecasts do not see it firmly back at2 percent until the second half of 2014.
This is in line with the bank's current interpretation ofits mandate, under which it sets monetary policy to getinflation to 2 percent within 2-3 years.
King also referred to the Fed's decision to state levelswhich unemployment would probably need to fall to before itstarted to raise interest rates.
"Is there a gain from trying to quantify how the (bank's)Monetary Policy Committee should manage the trade-off betweengrowth and inflation in the short run?," King asked.
"How much discretion to give to the MPC and how much shouldremain with the Chancellor is an interesting question that wasraised, but not fully resolved, in 1997," he added, referring tothe date when the BoE gained operational independence.
Earlier on Tuesday, former MPC member Adam Posen arguedagainst both long-term policy commitments - saying markets didnot take them very seriously - and targeting nominal GDP, sayingit would lead to higher inflation than inflation-targeting.
NO POLICY PANACEA
In his comments about the more immediate outlook for Britishmonetary policy, King left his options open, though his remarksare unlikely to change economists' expectations that the centralbank will not add to its 375 billion pounds ($595 billion) ofasset purchases any time soon.
"We are ready to provide more stimulus if it is needed,"King said, adding the bank would continue to assess whether tocut interest rates again - something it has resisted since March2009 lest it hurt fragile banks or building societies.
Although inflation was likely to remain above target formost of 2013, the MPC could look past this while it was drivenby semi-regulated prices like university tuition fees ratherthan market-generated price rises, King said.
Nonetheless, more asset purchases or rate cuts would not beenough to get Britain's economy back on track.
"Relying on generalised monetary stimulus alone ... is not apanacea," King said.
Britain's economy shrank around 6 percent in the 2008-09financial crisis, and has recovered much more slowly than itspeers. Growth in the last three months of 2012 was likely tohave been "considerably weaker" than in the previous quarter,continuing a trend of zig-zagging growth rates, King said.
A more solid recovery required three things, King said,citing supply-side reforms, stronger euro zone growth andrestructuring Britain's banks.
Some banks needed more capital and others - likestate-controlled Royal Bank of Scotland and LloydsBanking Group - would benefit from selling non-coreassets and a prompt return to private ownership, King said.
"With proper implementation, there is no reason why the twobanks with significant state shareholdings could not largely beback in the private sector within a relatively short period,"King said.
Lloyds (LLOY)