Recession looms but Bank will stick to its guns on inflation says King
BANK of England governor Mervyn King has conceded that the UK is entering a recession but said that the economic downturn will not stop the Bank’s Monetary Policy Committee working to keep inflation at its target level.
Speaking at a dinner in Leeds last night Mr King said that the massive increase in national debt to support Britain’s banking system would not push up inflation if it is managed properly.
And while admitting recent events have been “traumatic” and have badly shaken confidence, he said that the country now faces “a long, slow haul to restore lending to the real economy, and hence growth of our economy, to more normal conditions.”
He told the audience of 1,000 business people that “two pieces of good news should temper the gloom”.
“First, the banking system will be recapitalised and, in due course, the banking system will resume more normal lending, although by normal I do not mean the conditions that prevailed prior to August 2007.
“Second, oil prices have now fallen from a peak of $147 a barrel only three months ago to around $70 today. And wholesale gas prices have now also started to follow oil prices down. That will help to support the growth of real incomes as well as bringing down inflation,” he told the dinner to mark the MPC’s fact-finding trip to Yorkshire this week.
Mr King said that the MPC must continue to set the base rate to meet its 2% inflation target in the long-term. Inflation rose to 5.2% in September which he said was “worryingly high”.
He also said he hoped for a return to “boring” times because “the past few weeks have been somewhat too exciting. The actions that were taken were not designed to save the banks as such, but to protect the rest of the economy from the banks.”
Mr King called for the banking industry to adopt Yorkshire cricketing virtues of “patience and sound defence”.
“The long march back to boredom and stability starts tonight in Leeds,” he said.
The governor said that providing funds from the central bank to support the UK’s banking system could never be the solution to the crisis, but was just a “sticking plaster”.
“New sources of funding will develop only slowly, although the temporary government guarantees of new lending to banks will help. So it will take time before the recapitalisation leads to a resumption of normal levels of lending by the banking system to the real economy. And we cannot assume that there will not be problems in other parts of the financial system and in some emerging market economies to be overcome before the crisis can truly be described as over,” he added.
