Bank Governor shrugs off fears of deflation

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The Independent Online

Sir Edward George, who steps down as governor of the Bank of England on Monday, yesterday dismissed fears that deflation was a threat to the global economy, saying the UK was "a long way off" falling victim to the spectre of falling prices. He said deflation was not a relevant consideration for policymakers at the moment because he did not see it happening in the UK.

"There is an extremely low risk here, an extremely low risk in the US and even a pretty low risk in the Eurozone," he told MPs, making his swansong appearance before the Treasury select committee.

Charlie Bean, the Bank's chief economist who also gave evidence, put the possibility of deflation at "less than 5 per cent for the foreseeable future, probably less than 1 per cent". Asked what might change that, he said: "If consumers went on strike. But we're talking about a 5 to 10 per cent contraction in consumer spending."

Sir Edward, making his 49th appearance before MPs, said the gradual world economic recovery he anticipated was "not a done deal" and that the British economy faced risks from slower growth in the Eurozone and the danger that the moderation in house price growth could be sharper than expected. He said he was not "hugely excited" about recent signs that consumer confidence had improved in the UK and the US. "We see the world economic recovery as fairly gradual to around trend rather than a boom.... I don't think anything we have seen suggests a bounce [since the war ended]," Sir Edward added.

Asked about the Chancellor's proposed switch to the Eurozone's inflation measure - the harmonised index of consumer prices, which excludes house price inflation - the governor fudged the question of how much it differed from Britain's current RPIX measure. He said the difference was "about half a per cent or a bit more", backtracking from a previous estimate that put the difference at 0.75 per cent.

"I'm concerned we're trying to introduce too much precision into these matters. Frankly I don't know the difference between half a per cent and three-quarters of a per cent when it comes to the inflation target," he said.

The governor called for some measure of housing costs to be included in any new inflation index, which Gordon Brown is planning to have in place by the pre-budget report in November. "It would be weird to exclude the cost of housing altogether."

Sir Edward said the international economy had suffered two unexpected shocks in the past year: corporate governance scandals in the US and the war in Iraq, adding that the weakness of the exchange rate had helped cushion Britain from some of the effects.

Pressed on the impact of the US accounting controversies, he warned of the risk of "unintended consequences" of some of the steps taken to clamp down on corporate governance, such as the Sarbanes-Oxley Act passed last summer in the US. He said he hoped the SEC, the main US regulator, would "moderate" some of the steps taken.

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