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Mervyn King: No More U.K. Rate Cuts Ahead

Friday, 16 May 2008 04:32 PM

Don’t look for interest rate cuts from the Bank of England anytime soon, says its governor, Mervyn King.

Speaking to reporters recently, he said the bank will hit its 2 percent inflation target despite three cuts in the benchmark rate since December to 5 percent.

“We have not fallen prey to the sirens that urged deeper interest rate cuts as some other central banks have done,” King said at a news conference on the bank’s quarterly inflation report.

Inflation in the U.K. is lower than in other countries. Euro-region inflation accelerated to 3.6 percent in March, the highest in 16 years.

The U.S. consumer price index rose 4 percent for the year ending March. In China, inflation reached 8.5 percent in April, the most since 1996.

“The near term outlook for inflation has deteriorated markedly over the past three months,” King said.

“In the past year, oil and gas prices have doubled and food prices have gone up 60 percent,” King pointed out. “You can’t experience that kind of shock from the rest of the world without some squeeze on consumer spending.”

British inflation is rising due to the rest of the world economy, King said, shocks the bank expects will continue to affect the England for the next 18 months.

“These forces requiring adjustment are coming from the outside, and we have to adapt to them, King said, adding that while the bank is not projecting recession, “certainly further shocks could push us in that direction.”

“Inflation will return to the target and growth will eventually recover to a sustainable rate, but we will need to be patient,” King said.

King predicted that fuel, food and imports price increases filtering through to British households will put a squeeze on real take-home pay and slow consumer spending and growth.

“In these circumstances, household savings ratio is likely to rise,” King said.

“This is part of the rebalancing of the U.K. economy, a change that will be supported by the depreciation of sterling, which is now 12 percent below where it was in August.”

The bank’s central projection, King said, is for growth to slow sharply in the near term reflecting the squeeze on real income before recovering as credit conditions begin to ease and the depreciation of sterling boosts exports.

Slower growth is necessary to ensure inflation settles acceptably in the long term.

King observed that the impact of tight credit is most clear in property markets. Commercial property prices have fallen 16 percent since last summer, and house prices are now falling, too.

“We’re reverting to a more sensible balance and a more prudent approach to both lending and borrowing,” he said. “It’s a difficult adjustment, but one that we really needed to make.”

“The monetary committee is facing its most difficult challenge yet,” King said.

“My definition of success is waking up one morning and realizing I haven’t been worried about the banking system for a couple of months.”

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Don’t look for interest rate cuts from the Bank of England anytime soon, says its governor, Mervyn King.Speaking to reporters recently, he said the bank will hit its 2 percent inflation target despite three cuts in the benchmark rate since December to 5 percent.“We have not...
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Friday, 16 May 2008 04:32 PM
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