'Nice' age is over as Mervyn King dismisses further rate cuts

15 May 2008 / by Rachael Stiles
The Monetary Policy Committee (MPC) is facing "its most difficult challenge yet" Bank of England Governor Mervyn King has said, dashing hopes of further rate cuts and raising concerns about inflation.

"For the time being, at least, the 'nice' decade is behind us." Mr King said in his Inflation Report press conference, referring to the recent era of economic growth, and hinted that it might be two years before the UK sees another cut in the base rate.

As the UK travels along a "bumpy road as the economy rebalances", monetary policy "cannot, and should not, try to prevent that adjustment" by lowering interest rates, he said. With inflation now at three per cent – and likely to rise to 3.5 per cent – the MPC's main priority during the coming months will be to bring it back down to the two per cent target.

He reiterated the MPC's remit, that "the real stability upon which economic prosperity is founded requires that inflation remain low and stable for a long period of time." His outlook was a bleak one; it offered comfort in the fact that "Inflation will return to the target and growth will eventually recover to a sustainable rate." but he added that "we will need to be patient."

He blamed food prices, the cost of oil (now at $125 a barrel) and the weakening pound for inflation rising above its target, and said that these factors will continue to push the cost of living up. The Governor also refused to rule out the possibility of a recession, even admitting that while the UK economy might face several months of contraction, this is an inevitable period of adjustment that the economy will have to weather.

The Bank said that it expects another 15 per cent rise in fuel bills during the coming months, putting additional pressure on tightened budgets.

The Office of National Statistics (ONS) has also cast a shadow on the previously positive employment market, revealing that the number of unemployed people increased by 14,000 in the first quarter of 2008.

The official number of people claiming unemployment benefit has also risen for the third month in a row, by more than 7,000 to 806,300, but this figure is still 82,300 lower than in April 2007.

Experts have warned of the damaging effects of rising unemployment, such as households falling behind with mortgage payments, and consumers cutting back on their spending, bringing hard times for retailers.

In response to ONS figures which put food price inflation at 6.6 per cent, Sainsbury's has argued that it is in fact running at just more than two per cent, accusing the ONS of not accounting for a wide enough range of goods, and not taking into account the 30 per cent of supermarket sales that now derive from discounted items.

Furthermore, the United Nations' Food and Agriculture Organisation food price index has found that the soaring food prices which contributed to the global and economic turmoil of the past 12 months have shown signs of stabilising, an encouraging sign amongst difficult economic conditions.

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