Saturday, May 17, 2008

Bank of England warns on inflation and banking crisis

Mervyn King

Warning: Mervyn King today

There may be no cuts in interest rates until 2010, the Bank of England has indicated.

However, inflation is predicted to rise far above previous forecasts and stay well above the Government's target of two per cent for up to two years.

Mervyn King, the Bank governor, said price increases would cause "a squeeze on real take-home pay, which will slow consumer spending and output growth, perhaps sharply".

Saying that "the nice decade is behind us", he added that it was "quite possible we may get the odd quarter or two of negative growth".

Presenting the UK quarterly forecasts, the Bank said inflation could reach 3.7 per cent by the end of the year.

According to the Financial Times, inflation projections will not return to the two per cent target until early 2010, suggesting that the Bank has no room for rate cuts until then - even though the UK economy will slow sharply.

Families face a five-pronged assault on their finances, Mr King said in his bleakest assessment yet of the state of the country.

And the governor predicted:

• Gas, electricity and food bills will get even more expensive this year and will push inflation towards 4 per cent, possibly even higher;

• Economic growth is likely to slump towards 1 per cent by the end of the year, and there is now a risk of recession;

• The housing market will continue to fall after worsening 'markedly', but it is impossible to say how far values will tumble;

• Pay rises may be curbed, further damaging employees' quality of life;

• And the banking crisis could continue to run well into 2009, keeping mortgage costs painfully high.

Mr King's verdict cast a pall over Gordon Brown's political fightback by setting out in grim detail the extent of the difficulties facing the country.

The prospect of soaring inflation and slumping growth will also cast doubt on the Prime Minister's belief that he can pilot the economy to safer waters and avoid a recession.

Bank of England warns no more rate cuts before 2010 as credit crisis deepens | the Daily Mail

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