King warns of bumpy recovery

Unveiling the quarterly Inflation Report today, Bank of England governor Mervyn King said the UK economy would continue to “bump along the bottom” as inflation exceeds 3%.

King says the January figure for CPI inflation is likely to have exceeded 3%.

This would be the third episode when inflation has temporarily moved above the target by more than one percentage point, requiring him to write an open letter to the chancellor.

King says a gradual recovery in output may now be in prospect, but there are signs that many economies are on the mend, although much uncertainty remains about the likelihood of a sustained rise in real final demand in the world economy as a whole.

In the UK, King says while the banking system reduces its leverage, there will continue to be downward pressure on the supply of credit to households and businesses and on monetary growth.

The twelve-month growth rate of broad money, excluding intermediate financial companies, slowed further to around 1%. But, because asset purchases injected additional money into the economy, money growth is stronger than it would otherwise have been, and asset prices have picked up.

He says: “Since their troughs last year, equity prices have risen 50% and both commercial and residential property prices have increased by around 10%.

“It is also reassuring that total money spending has begun to grow again after the sharp falls at the beginning of last year.”

The bank decided to hold base rate at 0.5% at the beginning of February, which King says was done in order to keep inflation above its 2% target.

He says: “At its February meeting, the committee noted that the immediate prospect was for CPI inflation to remain well above the 2% target, and for output to recover slowly.

“The downward pressure from the persistent margin of spare capacity was likely to cause inflation to fall back to below the target for a period, before gradually returning to around the target as the recovery proceeded.

“In the light of that outlook and in order to keep inflation on track to meet the 2% target over the medium term, the Committee judged that it was appropriate to maintain Bank Rate at 0.5% and its stock of purchased assets financed by the issuance of central bank reserves at £200bn.”