UK might be on verge of recession, says King
· Governor issues warning on inflation and growth
· Rate cuts unlikely while food and fuel prices rise
- The Guardian,
- Thursday February 14 2008
- Article history ·
The Bank of England governor, Mervyn King, admitted yesterday that the economy might grind to a halt this year - but warned that the continuing risk of inflation made further interest rate cuts unlikely.
Faced with stagnating growth and rising prices for food and energy, King said the bank was facing one of its trickiest periods since assuming control of interest rate policy more than 10 years ago.
When asked whether a recession was possible this year, he said the predictions for growth in yesterday's inflation report were "not inconsistent" with two quarters of zero or negative growth - the technical definition of a recession.
He also warned that house prices could fall but said the committee's projection was for a few years of steady house prices, during which average earnings would catch up with house prices to some extent. "We are moving into territory where there is greater uncertainty than ever," he said.
The two key issues for the bank's monetary policy committee (MPC) were that the tighter credit conditions caused by the global crunch would continue to weigh down on demand in Britain and the rest of the world, while rising food and energy prices would continue to push up inflation.
"Both developments are now more acute than in November," King told a news conference in London to present the quarterly report. "As a result the near-term outlook is one of inflation rising sharply alongside a marked slowing in growth."
While the consumer price index is showing inflation of 2.2%, King said it was quite possible it could rise to 3% or more in the coming months. When that happened last year King had to write a letter to the chancellor, Alistair Darling, explaining why the CPI had strayed a percentage point above the government's 2% target.
The report's projections suggested the MPC thought money markets were too optimistic when they forecast that rates would fall to 4.5% or lower this year because that would have left inflation above its target in two years' time. But the report showed that if rates were left at 5.25%, inflation would be below the target - implying that the committee thinks rates will be cut but not as sharply as markets think.
That was enough to encourage some observers. David Page, an economist at Investec, said: "To our minds, the report and ensuing press conference suggested a further reduction in bank rate, but not by as much as markets had hoped. We expect the bank rate to reach 4.75% in August."
King stressed that the committee was concerned about rising inflation expectations among individuals as a result of rising energy and food bills and did not want higher wage demands to ensue.
But figures released yesterday showed few signs of this happening. The Office for National Statistics said growth in average earnings unexpectedly slowed to 3.8% in the three months to December from 4% in November. Unemployment in the same period fell by 61,000 while employment rose by 175,000, its biggest jump for a decade. "These data should provide some reassurance to the BoE that, at least for now, there is little if any evidence to suggest the emergence of second-round effects despite elevated inflation expectations and a clearly buoyant labour market," said Richard McGuire, strategist at RBC Capital Markets.
Turning to the global credit crunch, King and the Bank's executive director, Paul Tucker, said there were signs of improvements in some parts of the financial markets but other parts, such as securitisation, were still, in effect, closed.
No comments:
Post a Comment