King calls on govt to cut public deficit

Wednesday 20th January 2010

Mervyn King, the governor of the Bank of England, has once again warned the government it must cut the public deficit.

Mr King also told an audience at the University of Exeter last night that households would need to be "patient" over the next few years, as doubts about the UK's ability to grow remained.

Yesterday figures from the Office of National Statistics showed inflation was rising much faster than had been forecast by analysts. Mr King remarked: "It is clear that inflation is likely to pick up markedly in the first half of this year, a message reinforced by this morning's news that CPI inflation reached 2.9 per cent in December.

"The continuing pass-through of the earlier significant depreciation of sterling, while part of the necessary rebalancing of our economy, is offsetting to some extent the downward pressure on inflation from the large amount of spare capacity. And the rise in VAT back to 17.5 per cent means that CPI inflation is likely to rise to over three per cent for a while, or even higher for even longer were energy prices or indirect taxes to increase further."

The governor went on to say "the economic message from the crisis is clear: low-saving countries will reduce their net borrowing from abroad and so will no longer be able to play the role of consumer of last resort", adding that working with the international community was vital to achieving reform to the international monetary system.

Howard Archer chief UK and European economist at IHS Global Insight commented following Mr King's speech: "Mervyn King's speech indicates that he is still keeping an open mind on future developments in monetary policy despite the sharper-than-expected spike up in consumer price inflation to 2.9 per cent in December.

"The bottom line is that Mervyn King's speech suggests that the Bank of England remains in "wait and see" mode and is currently keeping all of its policy options fully open.

"The central bank currently seems in no hurry at all to raise core interest rates despite December's spurt in inflation. And it also suggests that while at least a temporary halt in quantitative easing seems most likely at the February monetary policy committee meeting, further increases cannot definitely be ruled out at this stage, particularly given that he stressed that money supply growth currently remains undesirably low."

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