Bank chief shrugs off fears of slowdown

Click to follow
The Independent Online

The UK economy has emerged from a "soft patch" over the autumn, the Governor of the Bank of England said yesterday as he played down fears of major economic weakness.

The UK economy has emerged from a "soft patch" over the autumn, the Governor of the Bank of England said yesterday as he played down fears of major economic weakness.

Mervyn King told MPs the Bank expected the economy to grow at its trend rate for the next two years as inflation headed back to the target.

His comments came as new figures calmed fears of a crash in the housing and retail economies and a leading global think-tank urged the Bank to raise interest rates.

Mr King, appearing before the Commons Treasury Select Committee, repeatedly rebuffed suggestions by MPs that the Bank should be cutting rates. He refused to be drawn on whether rates would have to rise but said it was "difficult" to see much spare capacity in the economy.

"Figures [so far] from the fourth quarter look a little stronger than the third quarter so the soft patch does not look to be the portent of a real slowdown," Mr King said.

"Consumer spending grew at about trend. I don't think the signs of slowing are particularly strong. Nothing has led us to change our view that growth is going to be around the trend for the next two years."

He said the 0.4 per cent growth in the third quarter was close to trend and indicated that the Bank expected it to be revised up.

"There is no doubt that in the third quarter there was a slowdown in both the official figures and business surveys but the business surveys are not consistent with a fall in manufacturing output," the Governor said.

"Broadly speaking, it is difficult, in our view, to think there is a great deal of spare capacity," he added.

Mr King said the Bank was puzzled by the low level of wage inflation, the lack of pass-through to inflation from either rising factory gate prices or the pound's fall against the euro.

"Looking ahead, there is a possibility that the link between inflation and estimates of the degree of pressure of demand on supply capacity will be weaker than has typically been the case in the past," he said.

"But the absence of spare capacity in the economy suggests there are also upside risks to the central projection for earnings and inflation over the forecast period.

"And the upside risk from a tight labour market chimes with the views I have heard on my regional visits in recent months."

Mr King and his fellow Monetary Policy Committee members Rachel Lomax, Charlie Bean, Stephen Nickell and Richard Lambert said they were right not to cut rates last week. Mr King defended the Bank's record on inflation, saying the current run of below-target outturns had followed 14 months of above-target inflation.

Michael Saunders, a UK economist at Citigroup, said: "All of this is rather more balanced than some market commentary and pricing that is looking for lower base rates in 2005."

In a wide-ranging cross-examination, Mr King repeatedly refused to be drawn on whether Gordon Brown would meet his "golden rule" on balancing the public finances. "It is important that the fiscal rules be met," he said.

He also played down suggestions the Bank should regulate hedge funds, saying there were few consumer protection issues and little benefit from collecting out-of-date information about individual funds.

Comments