Economy set for triple whammy, admits Bank chief

Senior economist warns of deteriorating outlook
Growth prospects hit hard by Osborne Budget
Unemployment and inflation likely to soar

The British economy faces a triple whammy of higher inflation, lower growth and rising unemployment, according to one of the Bank of England's most senior policy makers. Living standards over the next few years will rise only "minimally".

In an interview with The Independent, the Bank's chief economist, Spencer Dale, said that he did not expect inflation to return to its 2 per cent official target before the end of next year, about a year later than previously hoped, partly because of the hike in VAT to 20 per cent from January announced in the Budget.

And, although Mr Dale acknowledged that the emergency Budget had done much to avoid the risk of a UK sovereign debt crisis and a rise in interest rates, he also acknowledged that the Budget would mean lower growth. Mr Dale agreed that he would not be surprised if unemployment went higher in the next few months. For the next "three, four, five years, demand in the economy will be "incredibly anaemic" relative to previous recoveries.

Mr Dale said: "The near-term outlook for both growth and inflation has deteriorated over the past couple of months. Inflation has come out a little higher than expected, and the news on VAT in the June Budget means that the time it will take inflation to get back to target will be pushed out, and I expect it will be above target until the end of next year.

"Likewise, there are some signs that growth may be softening, again partly reflecting the June Budget. We've also seen tensions in the financial markets increase, related to concerns about sovereign debt issues in Europe. That has also affected the ability of banks and companies to raise cash.

"There's also the greater question of how things develop as countries around the world accelerate their fiscal consolidation plans."

The economy, said Mr Dale, would not return to normal "for an awfully long time".

The Office for Budget Responsibility has recently put the number of job losses in the public sector at around 600,000 over the next five years. Official data on economic growth in the second quarter of the year will be released by the Office for National Statistics tomorrow. While the pick-up in the economy is widely expected to have gathered pace, the European sovereign debt crisis in May and the June emergency Budget will have damaged business and consumer confidence, implying weaker growth and a possible "double dip" in future.

Meanwhile the European banking system faces a potential crisis tomorrow when the "stress tests" undertaken by European regulators on 91 leading institutions will be published. Banks that fail the tests – designed to determine their ability to withstand a financial shock – will have to be rescued or allowed to fail.

Over the next few years living standards, said Mr Dale, will be "less good than they would otherwise be" and will show only a "modest", "minimal" improvement. Tax hikes, muted pay rises, unemployment and public spending cuts will mean that things "won't feel good" for many families. Rising unemployment will also restrain house prices. The extent of the fall in public sector employment will depend on how public sector wage demands react to the pressure on budgets, said Mr Dale.

The Bank of England would remain wary of rising inflation even if there is evidence that the economy is weakening. Mr Dale condemns what he calls "dangerous talk" and complacency over rising prices: "I read a newspaper article the other day suggesting that a little more inflation might be a good idea because it would dissolve away mortgage debt. And a very senior executive said to me, 'aren't we going back to the bad old days when we just devalued and inflated our way out of trouble?'

"We know the evils of inflation. It adds to uncertainty, it destroys value of hard-earned cash and reduces the efficiency of the economy. We have to be incredibly vigilant."

Mr Dale is sometimes taken to rest on the "hawkish" end of the Bank's Monetary Policy Committee, broadly taking a more pessimistic view about inflation than some of his colleagues, and his latest remarks will add to the pressure, albeit nascent for now, on the Bank to nudge rates up more quickly.

If and when interest rates do start to rise they will add to pressure on homeowners, already suffering the tightest squeeze on household budgets since the Second World War. Mr Dale stressed the "huge" monetary stimulus the Bank was continuing to administer to the economy, with the bank rate at 0.5 per cent, a 300-year low, and the injection of £200bn directly into the economy via the Bank's "quantitative easing" programme. The impact of a lower bank rate, especially on those with tracker mortgages, has meant a substantial bonus in lower mortgage payments every month.

But Mr Dale added: "Since the spring of 2006 inflation has been above target for 41 out of 50 months and for two years it has averaged over 3 per cent. Now, we can come up with all sorts of clever and real reasons to explain our view but at some point people will say 'inflation just seems higher than it used to be' and that is a very substantial risk."

Suggested Topics
News
Susan Sarandon described David Bowie as
peopleSusan Sarandon reveals more on her David Bowie romance
Sport
Lewis Hamilton walks back to the pit lane with his Mercedes burning in the background
Formula 1
Arts and Entertainment
The new characters were announced yesterday at San Diego Comic Con
comic-con 2014
Sport
Arsenal supporters gather for a recent ‘fan party’ in New Jersey
football
PROMOTED VIDEO
News
i100
News
Bryan had a bracelet given to him by his late father stolen during the raid
people
News
A rub on the tummy sprang Casey back to life
video
Sport
sportDidier Drogba returns to Chelsea on one-year deal
Arts and Entertainment
The Secret Cinema performance of Back to the Future has been cancelled again
film
Life and Style
Balmain's autumn/winter 2014 campaign, shot by Mario Sorrenti and featuring Binx Walton, Cara Delevingne, Jourdan Dunn, Ysaunny Brito, Issa Lish and Kayla Scott
fashionHow Olivier Rousteing is revitalising the house of Balmain
News
i100
Arts and Entertainment
Christian Grey cradles Ana in the Fifty Shades of Grey film
filmFifty Shades of Grey trailer provokes moral outrage in US
News
people
News
BBC broadcaster and presenter Evan Davis, who will be taking over from Jeremy Paxman on Newsnight
peopleForget Paxman - what will Evan Davis be like on Newsnight?
Life and Style
fashionCustomer complained about the visibly protruding ribs
News
ebookA unique anthology of reporting and analysis of a crucial period of history
News
newsComedy club forced to apologise as maggots eating a dead pigeon fall out of air-conditioning
Arts and Entertainment
Jo Brand says she's mellowed a lot
tvJo Brand says shows encourage people to laugh at the vulnerable
Life and Style
People may feel that they're procrastinating by watching TV in the evening
life
News
Tovey says of homeless charity the Pillion Trust : 'If it weren't for them and the park attendant I wouldn't be here today.'
people
Sport
Rhys Williams
commonwealth games
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Senior Risk Manager - Banking - London - £650

£600 - £650 per day: Orgtel: Conduct Risk Liaison Manager - Banking - London -...

The benefits of being in Recruitment at SThree...

£18000 - £23000 per annum + Comission: SThree: SThree, International Recruitme...

Test Analyst - UAT - Credit Risk

£280 - £300 per day + competitive: Orgtel: Test Analyst, Edinburgh, Credit Ris...

Trainee Recruitment Consultants - Banking & Finance

£20000 - £25000 per annum + OTE £40,000: SThree: SThree Group have been well e...

Day In a Page

Evan Davis: The BBC’s wolf in sheep’s clothing to take over at Newsnight

The BBC’s wolf in sheep’s clothing

What will Evan Davis be like on Newsnight?
Finding the names for America’s shame: What happens to the immigrants crossing the US-Mexico border without documents who never make it past the Arizona desert?

Finding the names for America’s shame

The immigrants crossing the US-Mexico border without documents who never make it past the Arizona desert
Inside a church for Born Again Christians: Speaking to God in a Manchester multiplex

Inside a church for Born Again Christians

As Britain's Anglican church struggles to establish its modern identity, one branch of Christianity is booming
Rihanna, Kim Kardashian and me: How Olivier Rousteing is revitalising the house of Balmain

Olivier Rousteing is revitalising the house of Balmain

Parisian couturier Pierre Balmain made his name dressing the mid-century jet set. Today, Olivier Rousteing – heir to the house Pierre built – is celebrating their 21st-century equivalents. The result? Nothing short of Balmania
Cancer, cardiac arrest, HIV and homelessness - and he's only 39

Incredible survival story of David Tovey

Tovey went from cooking for the Queen to rifling through bins for his supper. His is a startling story of endurance against the odds – and of a social safety net failing at every turn
Backhanders, bribery and abuses of power have soared in China as economy surges

Bribery and abuses of power soar in China

The bribery is fuelled by the surge in China's economy but the rules of corruption are subtle and unspoken, finds Evan Osnos, as he learns the dark arts from a master
Commonwealth Games 2014: Highland terriers stole the show at the opening ceremony

Highland terriers steal the show at opening ceremony

Gillian Orr explores why a dog loved by film stars and presidents is finally having its day
German art world rocked as artists use renowned fat sculpture to distil schnapps

Brewing the fat from artwork angers widow of sculptor

Part of Joseph Beuys' 1982 sculpture 'Fettecke' used to distil schnapps
BBC's The Secret History of Our Streets reveals a fascinating window into Britain's past

BBC takes viewers back down memory lane

The Secret History of Our Streets, which returns with three films looking at Scottish streets, is the inverse of Benefits Street - delivering warmth instead of cynicism
Joe, film review: Nicolas Cage delivers an astonishing performance in low budget drama

Nicolas Cage shines in low-budget drama Joe

Cage plays an ex-con in David Gordon Green's independent drama, which has been adapted from a novel by Larry Brown
How to make your own gourmet ice lollies, granitas, slushy cocktails and frozen yoghurt

Make your own ice lollies and frozen yoghurt

Think outside the cool box for this summer's tempting frozen treats
Ford Fiesta is UK's most popular car of all-time, with sales topping 4.1 million since 1976

Fiesta is UK's most popular car of all-time

Sales have topped 4.1 million since 1976. To celebrate this milestone, four Independent writers recall their Fiestas with pride
10 best reed diffusers

Heaven scent: 10 best reed diffusers

Keep your rooms smelling summery and fresh with one of these subtle but distinctive home fragrances that’ll last you months
Commonwealth Games 2014: Female boxers set to compete for first time

Female boxers set to compete at Commonwealth Games for first time

There’s no favourites and with no headguards anything could happen
Five things we’ve learned so far about Manchester United under Louis van Gaal

Five things we’ve learned so far about United under Van Gaal

It’s impossible to avoid the impression that the Dutch manager is playing to the gallery a little