King predicts more pain as growth dives
Unemployment and inflation on the rise; growth, houses and sterling on the slide
Bank of England (BoE) governor Mervyn King yesterday refuted claims he had lost control of the economy as the central bank issued its darkest assessment of the UK economy since it gained its independence in 1997.
In its quarterly inflation report, the BoE predicted inflation peaking at around five per cent, more than double its two per cent target, with growth grinding to a halt for the rest of the year. The grim outlook led economists to warn that the monetary policy committee’s hands were tied, with little scope for interest rates to move up to counter rocketing inflation, or down to boost growth.
But King disagreed, telling reporters that “the MPC has complete flexibility to do whatever is appropriate with interest rates, they are not set in tablets of stone.”
King, who added that there was a feeling of “chill” in the economic air, blamed “the biggest financial dislocation since the Second World War” for the “unique circumstances”, which he admitted the MPC had not foreseen.
“Life is extremely difficult and will be for the UK economy over the next year,” he said warning that two consecutive quarters of growth, a technical definition of recession, were “possible”.
The Bank’s prediction, which downgrades its May forecast of one per cent growth by the end of this year, will be embarrassing for chancellor Alistair Darling, who still claims that the flagging economy will muster growth of two per cent this year.
Under fire for his handling of the economy, Darling said the government would stand by any action the Bank thought necessary to bring inflation back to target.
Data earlier showed the number of people on jobless benefit rose by 20,100 in July, the biggest jump since 1992, while wages rose by the weakest rate in five years in June. The gloomy outlook in the Bank’s inflation report hit the pound, which fell to a 12-year low against the dollar. But there is some good news. In two years time, the Bank predicts that inflation could undershoot its two per cent target. “We will return, if not to the nice decade, then at least to one that is not so bad,” said King.