Sir Mervyn King refused to rule out pumping more new money into the economy and warned the UK could slip back in to recession on its ‘long and winding’ road to recovery.
The Bank of England’s quarterly inflation report yesterday downgraded 2013 growth forecasts to around 1 per cent. Sir Mervyn said output would remain below its 2008 peak for the next three years.
The closely-watched report also warned that the rise of sterling against the US dollar and the euro is making it harder for British firms to compete in export markets.
‘Winding road’: Sir Mervyn King, the Governor of the Bank of England, has warned about sliding back into recession
The strength of the pound – due in part to the eurozone crisis – is a stumbling block for hopes of rebalancing the economy.
Despite the weak growth picture, the Bank has stopped short of increasing its money-printing programme, labelled quantitative easing (QE).
But King insisted the Bank had not lost its grip on monetary policy despite the Treasury’s grab of £35billion last week from the interest on government gilts bought in the QE programme.
Consumer price inflation rose by a surprise 2.7 per cent in October but King said the Bank’s nine-strong Monetary Policy Committee judged it was likely to fall back in the second half of next year, which heavily influenced the decision to leave QE on hold at £375billion. That decision fuelled speculation the Bank could be stepping back from further QE. But King insisted the MPC ‘had not lost faith in asset purchases as a policy instrument, nor has it concluded that there will be no more purchases.’
Vicky Redwood of Capital Economics said the report ‘suggested that the door remains wide open to more QE’ and predicted a further increase of £50billion in February, bringing the total to £425billion. Last week the Treasury pocketed £35billion of interest on the Bank’s holdings of QE gilts.
The cash boost comes at a crucial time for Chancellor George Osborne as he prepares his Autumn statement.
Under his plans £11billion will be used to trim this year’s deficit – currently running at about £121billion. King insisted that his move, which he conceded had the same effect as QE, in no way affected Bank’s ability to set monetary conditions or weakened its control over QE. He said the Bank remains in charge of the total amount and timing of gilt purchases and of the eventual unwinding of QE.
‘I think it would be wrong to try and create an issue about independence when there’s no substance to it,’ he said.
‘We’ve always been very clear that we do defend central bank independence when it matters, but this is a question of timing of cash flows for the Treasury.’
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