Bank of England Governor 'more uncertain' about economy

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Indy Politics

Bank of England boss Mervyn King today said he was "more uncertain now than ever" about the UK economy despite tentative signs of a recovery.

The Bank's Governor told MPs on the Treasury Select Committee he had "genuine concerns" over the path of the recovery as banks continue to restrict lending.

Mr King and fellow Bank policymakers agreed the worst of the falls were over and said the weak pound was helping bring Britain out of recession.

They added evidence so far was positive from its mammoth £125 billion quantitative easing (QE) programme to boost money supply.

However, the picture was "very mixed" in spite of green shoots from sectors in the economy, according to Mr King.

He said: "I feel more uncertain now than ever, because it's not a pattern of a recession coming into recovery that we've seen since the 1930s."

He added: "There are genuine concerns about how quickly the recovery will pick up - looking at the clear evidence, (firms) are finding it hard to access credit from the banking system.

"A combination of that and real uncertainty over the global economy makes it very difficult to be confident of a rapid recovery."

Mr King also told the Commons Committee that the Chancellor needed to set tougher goals to reduce the "extraordinary" UK public deficit.

Aiming to reduce the deficit - which has now soared to 12.5 per cent of gross domestic product (GDP) - to 5.5 per cent of GDP by the end of 2014 is an "awfully long time to show Britain is bringing down its deficit", he said.

He called for a clearer plan to slash the deficit in the next Pre-Budget Report.

"There'll need to be a plan contingent on the state of the economy to show how this deficit will be brought down to reach levels below those in the Budget figures," said Mr King.

Recent signs have suggested the worst of the recession is now over, with reports of growth in the powerhouse services sector signalling that the economy may see a positive output reading in the third quarter.

The housing market has also seen recent signs of life, while consumers are thought to be regaining confidence to spend.

But the Bank has already warned that the ongoing reluctance for banks to lend threatened to derail a sustained recovery.

Mr King reiterated that that still posed one of the biggest risks to the economy and said the Bank would also need to consider carefully the timing of any withdrawal of fiscal stimulus.

There is a risk the recovery will be a "long, hard slog", he warned.

He stressed policymakers were not "on the edge" of raising interest rates from their historic low of 0.5 per cent, although he said they stood ready under its remit to keep inflation at 2 per cent.

Last week's official inflation figures showed the Consumer Prices Index falling less than expected to 2.2 per cent in May from 2.3 per cent in April.

The threat of a deflationary spiral now appears to be easing, although the Bank's most recent forecast showed there was a risk of below-target inflation for some time.