Economy 'picking up', says Mervyn King

The Governor of the Bank of England today told MPs the economy appears to have rebounded at the start of 2011 and inflation pressures are still likely to wane as the year progresses.

Mervyn King told the Treasury Select Committee that the shock decline in the UK economy in the final three months of 2010 was one reason why he and his colleagues were reluctant to raise interest rates at the Bank's February meeting.

Mr King, who played down prospects of a rate hike following the publication of the Bank's quarterly inflation report, added there was still uncertainty over the impact of surging oil prices, in the wake of political turmoil in North Africa and the Middle East.

The Bank of England is faced with a complicated scenario - as surging inflation combines with a fragile recovery - and its nine-strong Monetary Policy Committee (MPC) has been divided over how best to respond.

Mr King told the committee: "Surveys that we have for the beginning of this year suggest that activity did pick up in the first part of this year.

"The nature of the recovery with the rebalancing going on means that it is quite likely that this recovery will be, in the phrase I used some months ago, choppy."

Gross domestic product suffered a shock 0.6% decline in the fourth quarter, as the Arctic conditions in December battered the services and construction sector.

Later in the meeting, Mr King and his fellow MPC members were grilled over the length of time the Bank had missed the Government's 2% inflation target.

Martin Weale, one of the three members to vote for an interest rate rise last month, said he was concerned inflation expectations would force wages up, while deputy governor Charles Bean said he had become more worried in recent months that high inflation would drag out.

Mr Bean said: "For me the balance of risks to inflation around the target has been shifting upwards in recent months."

However, Howard Archer, chief UK and European economist at IHS Global Insight, said the testimonies did not provide more clarity on when interest rates were likely to start rising.

He said: "Mervyn King continues to give the impression that he is very wary about raising interest rates in the near term at least."