BoE's King says near-term outlook less benign for inflation, growth than in Aug

BoE's King says near-term outlook less benign for inflation, growth than in Aug

	Published : Wed, 14 Nov 2007 11:46 By : Agencies Print this Story

LONDON (Thomson Financial) - The governor of the Bank of England Mervyn King said there is a growing dilemma of how to balance the downside risks to economic growth against the prospect of rising inflation.

Speaking after the release of the quarterly Inflation Report, King said the near-term outlook for the economy is 'less benign for both inflation and growth' following this summer's credit crunch.

King said the Monetary Policy Committee's central projection is for growth to slow sharply over the next year as past rises in interest rates and tighter credit conditions push up savings levels and weigh on investment.

He added that the recent surge in oil and food prices will hold back the growth rate of real incomes and moderate consumer spending, but they will also add to the Bank's inflationary concerns.

'They will also hinder the ability of the economy to expand without pushing up inflation', King said.

Asked about how the global economy was responding to the summer's credit crunch, King said a are balancing in the world economy is underway', following the 30 pct fall in the dollar's effective exchange rate over the last three years.

However he added that this rebalancing entails challenges in itself.

He said the UK is a 'pale shadow' of what's been going on in the US, noting that despite the surge against the dollar, the pound is 4 pct lower against the euro since August and 3 pct down on an trade-weighted effective basis.

Comparing today's growth projections to those made in August, King said 'the slowing we said in August was necessary is now underway, but will it be bigger than we thought was necessary to meet the inflation target'.

The BoE is projecting that GDP will grow below its long-run average over the coming year at an annual rate of just 2.0 pct. In 2007, the economy is projected to grow by around 3.0 pct.

'This looks like a fairly sharp slowdown, but not as sharp as those seen in preceding 30 to 40 years,' said King.

rachel.armstrong@thomson.com

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