By Matt Falloon
LONDON (Reuters UK) - The Bank of England's policy of creating new money to buy assets and boost demand is masking the true appetite for government debt and cannot go on indefinitely, the Conservatives said Tuesday.
But Conservative leader David Cameron, tipped to become the next prime minister after an election which the Labour government must call by mid-2010, said it was up to the central bank to decide how and when quantitative easing comes to end.
"You can't go on indefinitely printing money in this way," Cameron told a news conference. "But it won't surprise you to know that I am a great believer in an active monetary policy and I am great supporter of Bank of England independence.
"Predominantly, it must be for them to make that decision. Clearly, it does need the permission of the Chancellor of the Exchequer but it would be on the recommendation of the Monetary Policy Committee."
The Bank has slashed interest rates to a record low of 0.5 percent and embarked on a 175 billion pound asset purchase scheme -- mainly aimed at buying gilts -- in an effort to pull Britain out of its longest recession on record.
Data Friday showing an unexpected economic contraction in the three months to September has fuelled expectations that the central bank's Monetary Policy Committee may do more to engineer a recovery.
DEMAND FOR GILTS UNTESTED
The Conservatives are worried that record government borrowing as a result of recession, fiscal stimulus measures and extensive support given to the banks will damage investor confidence and drive up long-term interest rates.
"The market appetite for gilts hasn't really been tested yet because of the process of quantitative easing," Cameron said. "Clearly, it can't go on forever. Clearly, it has to stop at some stage. How it comes to an end and when it comes to an end will be a matter for the Bank of England.
"We do have to be careful as that happens to make sure we have fiscal policies that demonstrate we will be able to get our deficit down in good order."
The Conservatives have proposed a sharper fiscal tightening than Labour's plans to halve the budget deficit -- set to top 12 percent of gross domestic product this year -- in the next four years, but have set no target or timetable yet.
Economists have expressed some concern that there is not enough flesh on the bones of the opposition's pledges, and the continuing downturn may make it harder for a Conservative government to deliver, the scale of fiscal consolidation the party has hinted at.
At a Reuters Newsmaker event in London Monday, shadow chancellor George Osborne said tackling record government borrowing was vital to avoid a prolonged recession.
But he added, while the arguments favoured early action, fiscal policy should be tightened "as the recovery gathers pace" -- read by some commentators as a softening of the party's previously tougher tone on spending cuts.
(Editing by Mike Peacock)
