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Bank of England Governor Mervyn King has warned there may be a "considerable" way to go before interest rates return to "normal", adding that Britain should not expect a speedy economic recovery.
Appearing before the Commons Treasury select committee, King said he was most concerned about the strength of the economy as opposed to inflation.
He warned that despite a sustained UK recovery there were still concerns about the economy's recent stellar growth and monetary policy could still go in either direction.
King told the MPs that it would be a mistake to read too much into last week’s strong second-quarter growth figures.
The governor said the 1.1 per cent output rise between April and June was "encouraging" but added that a gradual improvement in credit conditions "seems to have come to a halt".
He said: "The wider economic problems around the world underline the fact that we cannot be confident that the recovery in demand, output and employment here in the UK will be sustained."
King stressed that there was a considerable way to go before interest rates are set to return to typical levels.
He said the Bank's rate-setting committee could perhaps increase efforts to boost the money supply.
"The debate is about the appropriate degree of stimulus, not about applying the brakes.
"I am arguing that we have room to use monetary policy in either direction. I don’t want to prejudge where it will need to go."
Committee chair Andrew Tyrie asked whether the chancellor's emergency Budget had increased the chances of a further slump.
King responded that he did not think it made a "significant difference to whether we get what is technically known as a 'double-dip' recession".
However he also warned that inflation may remain high throughout the next year, leading to rising household costs and tough austerity measures.
"During the rebalancing there is a risk that the level of money spending in the UK will remain weak, with the economy operating at low capacity," he said.
"That would push down on inflation potentially to a rate that is significantly below the two per cent target."
The Consumer Price Index inflation benchmark had been high for most of the past four years and would likely stay above the government's 2 per cent target for "much of next year", largely down to the chancellor's VAT hike to 20 per cent.
Should high CPI expectations continue it could be "difficult to bring inflation back down again", he warned.
King was also quizzed on whether the Bank was doing enough to help encourage lending to small businesses to aid the recovery.
He said the banking sector was struggling to meet higher requirements on capital strength imposed in the wake of the financial crisis.
But warned banks that they should put capital strength ahead of bonuses and dividends, ahead of next week's start of the half-year reporting season.
"It would be better for all concerned if there was less emphasis on distribution - whether in compensation or dividends - and more on building up their balance sheets," he said.
In addition, the Governor said that state-owned banks were also not being used to their greatest effect to increase lending levels.
He said their government-set lending targets were unlikely to be effective, given that they focused on gross lending rather than net, where repayments are also taken into account.
King insisted new competition in the bank sector was vital to see lending increased, with barriers to entry eased to encourage new players.
He said: "I do think we should try to encourage new entrants into the banking sector. They won't have same problems of legacy balance sheet difficulties."
The Bank of England governor and his peers from nearly 30 countries met in Switzerland this week and reached consensus on a 'Basel III' bank capital and liquidity rule to help avoid banks needed state aid again in a future crisis.
King told MPs: "In Basel we reaffirmed our collective view that it's important to implement the new standards over a long transition period because bank balance sheets are still recovering from the current crisis."
The Governor was also questioned by Chuka Umunna (Lab, Streatham) about a private conversation he had with King was also questioned by the committee about a private conversation he had with deputy prime minister Nick Clegg.
King told MPs he said nothing to Clegg during a call on 15 May that he had not already said in public, most notably at a press conference three days earlier.
He said he spoke to Clegg at the request of the new government, five days after Clegg announced he was forming a coalition government with David Cameron in which a faster programme of deficit reduction was agreed.
Article Comments
England is the most densly populated country in Europe and its population is increasing. Private industry which makes the money to support the country is decreasing thanks to the shortsightedness of Westminster and its sell out of everything British. So a growing population supported by a decreasing pot of money. This cannot be sustained no matter what King, Cameron, Osbourne, Clegg or any other so called expert thinks. There are only three options available;
1) Cut spending. So spending is cut but the population increases and private industry decreases, as long as our economy is healthier then the third world countries most migrants come from then they will keep coming.
2) Increase private industry thus increasing the money available. But cuts to spending means job losses, with job losses comes less money to spend thus private industries cannot survive.
3) Reduce the population to a level that the pot of money available can sustain. Close our borders, leave the EU! never happen with Westminster at present.
So this country is heading at speed into the brick wall. Westminster and the so called economic experts can talk statistics all it wants. Mass immigration, globalization and selling off our industries to foreign millionaires was a stupid and reckless policy.
Andy Cooper
28th Jul 2010 at 9:56 pm
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