MPC hawk King falls into line with George on rates

The budget tax hikes will hit consumer spending and depress wages, a deputy governor of the Bank of England said yesterday in the latest hint that it is no hurry to raise interest rates.

Mervyn King, who appears to have abandoned his "hawkish" stance and fallen in line with the majority on the Monetary Policy Committee, warned the housing market was set for a slowdown.

He told the British Chambers of Commerce annual conference it was "most unlikely" that consumer spending would go on rising at its current rate.

"The extra taxes imposed last week will reduce consumer spending to release resources to provide for better public services," he said. "Our view has been that [consumer spending] is likely to slow in any event."

He said over the long run the higher levels of national insurance contributions paid by both firms and workers from next year would result in lower growth of real take-home pay.

Mr King played down fears that a booming housing market would trigger an inflationary surge. He admitted the Bank had been surprised by the recent leap in prices but said people should not expect them to carry on rising at their current rate of about 15 per cent.

"We still think because wealth has not risen very fast outside housing, that real income growth will slow," he said. "We think there are good reasons for thinking consumption will slow down and house prices will fall back."

Mr King also cast doubt on the strength of the global recovery, saying it was "too soon to say it is entrenched".

His comments come a day after the Governor, Sir Edward George, claimed to speak on behalf of the MPC in saying there were no "immediate concerns" about the levels of household spending and debt.

The message was echoed yesterday by Gus O'Donnell, head of macroeconomic policy at the Treasury. "People may look at their consumption levels going forward with this talk of tax rises," he told MPs.

Mr O'Donnell told the Commons treasury committee tax rises and lower income growth were the reasons behind the Treasury's forecast for consumer demand to slow.

"Average earnings figures are much lower this year than they were last and this lower income path is one of the reasons we expect consumption to be lower," he said.

However, the BCC, which has criticised the planned tax hikes, said it was "surprised" at Mr King's assessment of the Budget.

Anthony Goldstone, its chairman, said: "While the rise in employee national insurance would normally dampen consumption, most of that money is being channelled back via tax credits to people with the need to spend."

Juli Collins-Thompson, an economist at BNP Paribas, said: "The problem the Bank is wrestling with is there is not enough conviction about the sustainability of the recovery overseas – which means the consumer sector can continue to grow above trend for a period to keep the economy afloat."

Meanwhile, new figures yesterday added to the growing consensus that the UK's manufacturing sector is emerging from recession.

Confidence among British manufacturers surged in April to its highest level in more than eight years, the CBI said.

Its poll of almost 1,000 firms showed the balance of firms' optimism leapt from minus 31 to plus 21 per cent, the strongest reading since January 1994.

"The deepest manufacturing recession for over a decade appears to be on the turn," said Ian McCafferty, the CBI's chief economic adviser.

Domestic orders, exports and output are all expected to increase. However, orders and output fell over the last four months, firms are cutting jobs and investment and the number of factories running below capacity has hit a nine-year high.

"We believe interest rates can remain at their current level for some time to come," Mr McCafferty said.