BOE's King: monetary policy should be conducted for domestic reasons

TOKYO (Reuters) - Central banks should conduct monetary policy for domestic reasons and if they follow this rule then global economic growth will accelerate, Bank of England Governor Mervyn King said on Tuesday.

Group of Seven countries were in agreement that no country should intervene in foreign exchange or have a specific target for their currency, but that if a country is pursuing policies to boost its domestic economy this could cause the country's currency to fall, King said after giving a speech in Tokyo.

Some countries have expressed concerns that aggressive bond purchases by some central banks could push down their currencies and spark a wave of competitive devaluations that could harm global trade.

King tried to increase government bond purchases by the BOE at its most recent meeting but was voted down, showing that central bankers are struggling with how far they can push unconventional monetary policy.

"Domestic monetary policy should be conducted for domestic reasons, and if we follow this the global economy will accelerate," King said the speech.

"If a country is pursuing policies to improve the domestic economy, that could push down the currency a bit, but that would lead to increased domestic spending."

Earlier this month, Group of Seven countries issued a statement saying member countries were committed to conducting monetary policy for their domestic economies and not to target exchange rates.

The statement was issued in response to concerns about the Bank of Japan's shift to increased government debt purchases, known as quantitative easing, but it raised questions about how far and how long central banks can pursue unorthodox policies without harming the global economy.

Minutes from the BoE's last policy meeting on February 6-7 showed outgoing Governor King and two others voted for an increase in bond purchases to 400 billion pounds ($604.38 billion) from 375 billion pounds. King steps down in June.

The proposal to expand QE was rejected in a 6-3 vote. In the end, policymakers also kept the BOE's main interest rate at 0.5 percent.

Policymakers also considered expanding the range of assets they purchased under QE -- typically negative for a currency because pumping more money into the economy increases the supply -- and cutting interest rates.

The BOE next meets on March 6-7.

Since the 2008 financial crisis, central banks in many advanced countries have been buying government debt to stimulate their economies and prevent deep recessions.

The BOE's QE program has helped Britain's economy by preventing a sharp contraction in money supply, but monetary policy is no "panacea" and the economy still faces adjustments for commercial bank balance sheets, productivity and wages.

"Monetary policy is good at bringing forward to today future spending," King said.

"But stimulus is still needed to encourage future spending."

King added that it was a perfect time for the government to pursue structural reforms as this can offset the decline in wages and shift production more toward export-oriented goods.

King also warned that negative real bond yields in Britain were not consistent with a sustainable economic recovery and that low interest rates globally were unsustainable. ($1 = 0.6618 British pounds)

(Editing by Kim Coghill)