HIGHLIGHTS-BoE policymakers before Treasury committee

LONDON, March 1 (Reuters) - Bank of England Governor Mervyn King and other members of the Monetary Policy Committee gave evidence to parliament's cross-party Treasury Select Committee on Tuesday.

Rising inflation and a patchy recovery have left the BoE's nine monetary policymakers divided over how best to respond. In February, six voted to keep interest rates at 0.5 percent and three voted to raise them.

Following are highlights from their testimony:

MILES ON ECONOMIC DAMAGE

"I think it is very unlikely that we get back to a trajectory that we might have stayed on if we hadn't got into the financial mess of 2007/08.

"I don't think that means that we can't hope and expect to a growth rate that looks fairly average and normal in the longer context of history. But I think we have had some lasting damage on the economy and that is a reflection on just how damaging a financial crisis can be."

KING ON PUBLIC ANGER ABOUT CUTS

"This is a big political problem for you. Now is the period when the cost is being paid. I'm surprised the real anger hasn't been greater than it has."

KING ON FALL IN LIVING STANDARDS

"The squeeze on living standards is inevitable in aggregate because of what happened. We have to accept to accept that squeeze and we will find a way through it."

KING ON REDUCING BUDGET DEFICIT

"To have a plan to reduce this enormous budget deficit over a period of five years is the right thing to have because otherwise we would all suffer.

"The interest rate at which we can borrow has fallen relative to German Bund yields, which is the benchmark, whereas otherwise if we had had no plan to deal with the deficit it almost certainly would have risen."

MILES ON WAGE RISES

"Many companies feel that they are in a slightly better position now that they have got through an extraordinarily couple of years.

"The workforce has stayed with them, they took the pain of wage freezes at a time when inflation was substantially positive and this year maybe there is some scope for some wage increases, but almost certainly less than the rate of inflation."

KING-LOW LONG-TERM RATES DROVE HOUSE PRICES

"I think what I've also stressed, in my judgement, the single biggest factor influencing the upward move of house prices, was very low levels of long term real interest rates in the world economy and in our capital markets.

"That influence of very low long-term interest rates is still very much in evidence. The biggest risk is not developments in our economy, but developments in the world economy in which interest rates are very much higher.

"If it happened tomorrow and China suddenly decided to stop saving, than real interest rates would move up sharply, we would see significant falls in asset prices and there would be a major problem."

KING ON PICK-UP AT START OF YEAR

"Surveys that we have for the beginning of this year suggest that activity did pick up in the first part of this year.

"The nature of the recovery with the rebalancing going on means that it is quite likely that this recovery will be, in the phrase I used some months ago, choppy."

WEALE ON VOTING STANCE

"As the governor has said, it's a question of judgement about the balance of risks. Looking at the prospects for next year I think it's fair to say I'm more worried than other members that these sort of expectations may get built into the wage bargaining, price setting process.

"I also make the point that fan chart in the inflation report is conditioned on market interest rates, and those do show an increase coming around the middle of the year. One might infer that not all members think that would be an appropriate thing to do."

KING ON RAISING RATES AS GESTURE

"To raise interest rates just to make a gesture or a signal is self-defeating because we would then find ourselves below target looking further ahead."

KING ON WAGE TALKS

"All of us on regional visits pay great attention to what we are hearing about the climate for wage negotiation settlements around the country and we feed that into our thoughts.

"We also look very carefully at measures of inflation expectations."

KING ON STERLING

"We are not seeing a continuously declining exchange rate. We have seen a big movement in sterling which in and of itself added six percentage points to the domestic consumer price level."

FISHER ON IMPACT OF VAT RISE

"VAT added 1.5 percentage points to the level of CPI inflation. The change means the curent rate of CPI is around 1.5 percentage points higher than it would have been without the VAT change."

KING ON BOE'S REMIT

"I don't share that view (that the BoE's remit should be more like that of the U.S. Federal Open Market Committee) because I think the problem with the FOMC remit is that it can lead people to think that there is a long-run trade-off between inflation on the one hand and output and employment on the other. I do not believe that to be true."

KING ON INFLATION EXPECTATIONS

"We accept that inflation expectations are crucial to evaluating the medium outlook for inflation.

"I don't believe we've yet seen signficant evidence of a pick up in medium term inflation expectations.

"It's reasonable to believe that if we continue to experience above target inflation for long enough there could be an upside risk to inflation expectations."

KING ON OIL PRICES

"Oil prices have risen by a third since November, half of the rise had taken place by February, that was clearly factored into our projections.

"We assumed that oil prices would follow the path implied by market expectation. Clearly it's risen since. An awful lot will hinge on how far this rise in oil prices persists, whether the situation in the middle east become clarified and it falls back again.

"These are very uncertain factors, these are the things that do move inflation around, not just up but down too."

KING ON PROJECTIONS

"The projections that we published in the inflation report a couple of weeks ago have the characteristic that the inflationary pressures are pretty much back to target by around the middle of this year.

"But of course that doesn't show up in the 12-month measure until well into 2012."

KING ON INFLATION OUTLOOK

"Financial markets clearly do not believe that the rate of increase of prices that we have seen will persist, even if the levels will persist.

"The broad judgement of the committee is that the increase in inflation that we have seen in the short-run would be expected to come back towards the target and the debate on the committee is not about whether that will happen, but it's about the speed and the extent to which inflation will fall back to the target.

"I would certaintly expect to be writing letters through the rest of this year."

KING-NO COORDINATION ON FISCAL/MON POLICY

"There has never been any attempt on any occasion to influence the MPC on what decisions it should take."

"We are setting monetary policy to meet the inflation target, taking into account the fiscal stance of the government. We think the fiscal conslidation will have a dampening effect on growth of demand relative to what it would have been had it not occurred."

"We've certainly discussed the case for and against fiscal consldiation and I've explained the stance the MPC has taken on monetary policy.