King warns against end to stimulus
By Robert Barr |
July 29, 2010, Thursday
|
Print Edition
Print Edition
THE governor of the Bank of England said yesterday that the need to stimulate the economy still takes precedence over concerns about high inflation at a time when the outlook for the global economy remains uncertain.
Governor Mervyn King told Parliament's Treasury Committee that Britain cannot be confident that a sustained recovery is under way despite last week's report that the economy grew 1.1 percent in the second quarter - the third quarter of recovery from a deep recession.
"The debate is about the appropriate degree of stimulus, not about applying brakes," King said.
The bank's Monetary Policy Committee has kept its key interest rate at an all-time low of 0.5 percent, though one member - Andrew Sentance - is advocating a hike to 0.75 percent because of concerns about inflation staying above the official 2 percent target.
"We continue to face the challenge of rebalancing our economy away from consumption towards net exports, and raising our national savings rate. During the rebalancing, there is a risk that the level of money spending in the UK will remain weak, with the economy operating below capacity. That would push down on inflation potentially to a rate that is significantly below the 2 percent target," King suggested.
He said that consumer price inflation, now 3.2 percent, is likely to stay well above 2 percent through next year, especially since the government plans to raise the broad-based sales tax to 20 percent from the current 17.5 percent. He conceded there is a risk that expectations of high inflation could become ingrained, and feed continuing price rises.
"The (Monetary Policy Committee) faces a difficult challenge in balancing those risks," King added.
He said the economic situation was still far from normal, and that the improvement in credit conditions seen at the start of the year had stopped.
Governor Mervyn King told Parliament's Treasury Committee that Britain cannot be confident that a sustained recovery is under way despite last week's report that the economy grew 1.1 percent in the second quarter - the third quarter of recovery from a deep recession.
"The debate is about the appropriate degree of stimulus, not about applying brakes," King said.
The bank's Monetary Policy Committee has kept its key interest rate at an all-time low of 0.5 percent, though one member - Andrew Sentance - is advocating a hike to 0.75 percent because of concerns about inflation staying above the official 2 percent target.
"We continue to face the challenge of rebalancing our economy away from consumption towards net exports, and raising our national savings rate. During the rebalancing, there is a risk that the level of money spending in the UK will remain weak, with the economy operating below capacity. That would push down on inflation potentially to a rate that is significantly below the 2 percent target," King suggested.
He said that consumer price inflation, now 3.2 percent, is likely to stay well above 2 percent through next year, especially since the government plans to raise the broad-based sales tax to 20 percent from the current 17.5 percent. He conceded there is a risk that expectations of high inflation could become ingrained, and feed continuing price rises.
"The (Monetary Policy Committee) faces a difficult challenge in balancing those risks," King added.
He said the economic situation was still far from normal, and that the improvement in credit conditions seen at the start of the year had stopped.
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