Bank of England grows nervous about recovery

Interest rates likely to be kept low

A leading Bank of England policy-maker yesterday poured fresh doubt on the strength and sustainability of a British economic recovery, and added to expectations that monetary policy would be kept extremely loose well into next year, even as evidence grows that the housing market is perking up.

Kate Barker, an external member of the Bank's Monetary Policy Committee for the past eight years, told an audience of business people in Wales that "monetary policy needs over the coming quarters to continue to be set in order to sustain confidence, and to support lending and borrowing".

"As the expected recovery becomes established, monetary policy will also need to be sensitive to the concern that too rapid an adjustment in private sector balance sheets could be provoked by premature monetary tightening," she said, suggesting that a recovery could not be relied upon.

While noting the relative strength of business confidence, and the property and stock markets, Ms Barker added: "It is still unclear that this rate of improvement will be maintained into the autumn. Some of the recovery in manufacturing, in the UK and elsewhere, reflects a less rapid pace of de-stocking, and special support for the automotive industry has supported demand and output in that sector. As these positive factors fade, there is a risk that the pace of recovery may falter and the path of output could be quite uneven over coming quarters."

Her doveish views echo those expressed by the Governor, Mervyn King, and the MPC member David Miles last week. Ms Barker pointed in particular to rising unemployment and the scale of "unsustainable" debt as factors that could hold back spending and growth in activity. The minutes of this month's Monetary Policy Committee meeting also reveal the Bank to be nervous about the prospects for the economy without the life support it has received from the authorities.

The minutes state: "There had been some promising indicators from asset markets. But the lesson from previous financial crises was that they were not resolved quickly and that there could be false dawns. The banking system still had to complete a process of balance sheet adjustment, including raising new capital, and bank lending remained weak."

There was no mention of so-called "negative interest rates" on reserves held by commercial banks. Members voted unanimously to keep policy steady, with Bank rate at 0.5 per cent and a quantitative easing target of £175bn. Mr King and Mr Miles, who alongside Tim Besley, now no longer on the committee, sought a quantitative easing target of £200bn in August, agreed not to press for more.

The British Bankers' Association said mortgage approvals were 81 per cent higher than at this time last year, though they remained abnormally low.

The Bank of England's latest Agents' Report was also cautiously optimistic, saying consumer spending had grown modestly and the recovery in the housing market had continued.