Tags: inflation | slowdown | banks

U.K., U.S. Bet Big on a Slowdown

Wednesday, 09 Jul 2008 12:03 PM

Bank of England Governor Mervyn King is worried about inflation and says a slowdown in United Kingdom economic growth is needed.

In the U.S., meanwhile, Fed Chairman Ben Bernanke and the Federal Open Market Committee (FOMC) seem to be hoping that an economic slowdown will cause inflationary pressures to moderate during the months ahead.

Testifying before Parliament, King expressed concern about inflation. He sees it rising to more than 4 percent in the next few months. The current level of 3.3 percent is already well above the central bank’s target of 2 percent.

As in the U.S., the problem is rising energy and food prices.

“Over the rest of the year, the impact of these changes will continue to pass through the supply chain to household bills and consumer prices,” King said.

Unlike central bankers in the U.S., King seems to be able to speak clearly about his plans to address inflation.

“The economic slowdown will need to be sufficient to ensure that inflation does not persist above the target,” King said in his opening remarks.

Rather than providing clear details, the Fed said that it “expects inflation to moderate later this year.”

In another speech, King warned Britons to expect a “one-year pause” in the growth of living standards as ever-rising energy and food bills continue to grow as a share of household incomes.

While speaking bluntly, King is also aware of the risks he faces.

“But, at the same time, we need to avoid a slowdown that is so pronounced that it would pull inflation down, not just to the target, but below,” he continued, acknowledging the tightrope policy-makers must walk.

Meanwhile, the Fed is doing everything that it can to “promote sustainable economic growth and price stability.”

King also told Parliament the BoE is closely monitoring indicators of inflation expectations. He is slightly troubled that investors think inflation will be increasing at a faster rate in coming months.

More optimistically, Paul Tucker, the director of markets at the Bank of England, said that while short-term inflation expectations have gone up, he still thinks most consumers and investors have confidence in the bank to bring inflation down to 2 percent over the next two years.

“Near-term inflation expectations have clearly gone up, but I would say so far we can take a degree of encouragement from medium-term inflation expectations,” he said.

Credit markets in the U.S. seem to be saying that they doubt the Fed is mounting a credible fight against inflation. Long-term interest rates continue to reflect concerns about growing inflationary pressures.

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Bank of England Governor Mervyn King is worried about inflation and says a slowdown in United Kingdom economic growth is needed.In the U.S., meanwhile, Fed Chairman Ben Bernanke and the Federal Open Market Committee (FOMC) seem to be hoping that an economic slowdown will...
inflation,slowdown,banks
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2008-03-09
Wednesday, 09 Jul 2008 12:03 PM
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