BoE's King says outlook less benign for inflation, growth than in Aug UPDATE

BoE's King says outlook less benign for inflation, growth than in Aug UPDATE

	Published : Wed, 14 Nov 2007 12:05 By : Agencies Print this Story

(adds details on housing market, recent MPC meetings, King reappointment)

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.

The governor noted that the global economy has grown extremely fast over the last five years, and the chance that growth will be as strong over the next five years is 'less than an evens bet'.

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.

On the housing market, the governor said that there are still 'mixed signs' as to whether a significant slowdown is starting, but said it is starting to cool.

However, he added that consumer spending may not be particularly sensitive to modest falls in house prices, due to the cushion of equity built up by homeowners in recent years.

King denied that an aversion to bailing out financial institutions following the start of the credit crunch in August lay at the heart of why the MPC has not cut interest rates already.

In the Inflation Report, the MPC conceded that a cut could be 'misinterpreted as a signal that monetary policy was focused on supporting the financial systems and not on meeting the inflation target'.

King said that may have been a consideration in September and maybe October but that recent data did not merit a cut in borrowing costs just yet.

He noted that official output data have been higher than anticipated -- the UK economy grew by 0.8 pct in the third quarter -- and that the changes in the financial markets and credit conditions have not yet fed through into business investment or retail sales.

Moreover, he noted annual CPI inflation has risen to an above-target 2.1 pct in October and that inflation expectations remain elevated.

'It's a matter of data, not a matter of time,' he said.

King also denied that the run on Northern Rock would hit economic confidence going forward.

'We are still going through the adjustment of markets, and I think once we get through that people will look back and realise that the underlying structures are sound,' he said.

King refused to state he wanted another term as governor, but said a decision about what happens after the end of his current term in June can wait till the new year.

rachel.armstrong@thomson.com

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