UK recovery uncertain, says Bank of England Governor

Bank of England Governor Mervyn King today warned that a sustained UK recovery was still uncertain despite the economy's recent stellar growth.

Mr King told the Treasury Select Committee that a 1.1% output rise between April and June was "encouraging" but added that a gradual improvement in credit conditions "seems to have come to a halt".

He said: "The wider economic problems around the world underline the fact that we cannot be confident that the recovery in demand, output and employment here in the UK will be sustained."

The Governor stressed that there was a "considerable distance to travel" before interest rates - currently at a record low 0.5% - were back at typical levels. The Bank's rate-setting committee could even increase efforts to boost the money supply.

"The debate is about the appropriate degree of stimulus, not about applying the brakes," he said.

Pressed by committee chairman Andrew Tyrie on whether British Chancellor George Osborne's emergency Budget had increased the chances of a further slump, the Governor said: "I don't think it made a significant difference to whether we get what is technically known as a 'double-dip' recession."

But he also warned that inflation would remain high throughout most of 2011 in a further blow to households facing rising costs and tough austerity measures.

He said the Bank's Consumer Price Index inflation benchmark had been high for most of the past four years and would likely stay above the British government's 2% target for "much of next year" - largely down to the UK Chancellor's VAT hike to 20%.

He cautioned it would be "difficult to bring inflation back down again" if high CPI expectations became engrained.

Although Monetary Policy Committee member Andrew Sentance is pushing for a rate hike to control inflation, his colleagues are not yet convinced.

IHS Global Insight economist Howard Archer said most MPC members "continue to have considerable concerns about the outlook" but said August's meeting could be a "sparky affair" following much higher than expected growth figures.

MPs also questioned Mr King on whether the Bank was doing enough to help encourage lending to small businesses to aid the recovery.

The central bank boss said there was little the Bank could do, as the banking sector was struggling to meet higher requirements on capital strength imposed in the wake of the financial crisis. But he sent out a warning shot to banks ahead of next week's start of the half-year reporting season, saying they should put capital strength ahead of bonuses and dividends.

"It would be better for all concerned if there was less emphasis on distribution - whether in compensation or dividends - and more on building up their balance sheets," he said.

State-owned banks were also not being used to their greatest effect to increase lending levels, according to Mr King.

He said their Government-set lending targets were unlikely to be effective, given that they focused on gross lending rather than net, where repayments are also taken into account.

Mr King insisted new competition in the bank sector was vital to see lending increased, with barriers to entry eased to encourage new players.

But the flurry of competition expected after the financial crisis has failed to materialise, leading to calls for regulations to be eased to smooth the way.

The cross-party committee recently announced the launch earlier this month of an inquiry into competition in the sector.

Mr King said: "If there are impediments in the regulatory system then we need to find a way through it so new banks can get going."

The Governor reiterated his support for the British government's Budget measures to reduce the deficit and similar actions across Europe.

He also suggested the US has been wrong to prioritise growth over cutting debt levels.

"All countries need to have a credible medium-term plan within which they can demonstrate that they will get back to a position in which structural deficits are eliminated and there is a sustainable path for the long-term public finances," he said.

"Not spelling it out is, I think, a problem."

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