Crunch far from over, warns Bank of England chief Mervyn King

Bank of England Governor Mervyn King today gave his approval to the new ruling coalition's fiscal plans, declaring himself "very pleased" by what he had seen.

In comments following the publication of the Bank's quarterly inflation report, Mr King said the UK's deficit problem would take a full parliament to fix.

But he was content that the Liberal Democrat and Conservative blueprint provided a "clear and binding commitment" to tackling the issue.

In a further slap to the previous government, Mr King said Labour's plan for dealing with the situation lacked ambition.

Mr King said markets had been waiting for the election to be over and now "need and want a very strong signal" from the Government.

The Governor added: "The most important thing now is for the new Government to deal with the challenges of the fiscal deficit - it is the single most pressing problem facing the UK and it will take a full Parliament to deal with it."

But he appeared pleased by what he knew of the coalition's plans.

"I have been told what is in the agreement between the Conservatives and Liberal Democrats this morning and I am very pleased that there is a very clear, binding commitment to accelerate the reduction in the deficit," he said.

Mr King also fired an apparent parting shot at Gordon Brown and Alistair Darling, stating that he believed Labour's plans to deal with the deficit had needed to be "more ambitious".

Prior to the election, Mr King reportedly commented that whoever won the poll faced the prospect of being turfed out of government for a generation due to the unpopularity of necessary spending cuts and taxes.

But he appeared to distance himself from the alleged quotes today. They needed to be taken with "a big pinch of salt", Mr King said.

The inflation report suggested that spending cuts, although necessary, could hamper the pace of the UK's economic recovery.

The Governor described the UK's two successive quarters of economic growth as "no small achievement".

He added that the pick-up is forecast to accelerate in the coming months: "The recovery is likely to gather pace over the next year, underpinned by the considerable stimulus stemming from the highly accommodative monetary stance, together with a projected further expansion of world demand and past depreciation of sterling."

But this pace will be dampened by substantial fiscal tightening and the need for a more robust banking sector, the report suggested.

As for inflation, the Bank predicts it will remain above the 2% target for the rest of 2010.

It is then expected to fall below this level and remain under 2% for much of the following two years, even if interest rates remain on hold.

But Mr King added that the pace and extent of the fall in inflation remain "highly uncertain" and that "recent experience suggests that there are substantial risks in both directions".

On news of the likely downward movement of inflation below its target in the medium term, the pound surrendered earlier gains in the currency market.

In today's comments, the Governor also warned against the dangers of allowing Greece's sovereign debt crisis to spread.

"Dealing with a banking crisis is bad enough, this would be worse," he said.