Wednesday May 14, 11:44 AM
BoE's King says UK may well suffer 'odd quarter or two' of negative growth
LONDON (Thomson Financial) - The UK may well sink into a technical recession for the first time since the early 1990s even a inflation rises further above target, the Bank of England's governor Mervyn King warned.
In a press briefing, King acknowledged that the economy may experience an 'odd quarter or two' of negative growth, but that he will likely have 'plenty of opportunities to write letters' to Chancellor of the Exchequer Alistair Darling to explain why inflation is running so far above the 2.0 percent target.
'The Monetary Policy Committee is facing its most difficult challenge yet,' King said, adding that inflation will return to target and growth will pick up, but that patience will be required.
The comments came after the release of the BoE's quarterly Inflation Report, which showed that CPI (NYSE: CPY - news) inflation may well touch 4.0 percent in the autumn, two percentage points above the target, just as growth will slump to an annual rate of 1.0 percent as households' real incomes are squeezed.
Still, King said the economic crisis will not be anywhere as bad as the 1930s depression, as sectors outside of finance and property are faring better.
The governor rejected any notion of changing the central bank's remit, stressing that changing the inflation target would not make the rate-setters' job any easier.
'This is not the moment to change the inflation target,' he said.
Regarding the government's 2.7 billion pound tax giveaway yesterday, King said the measure was 'relatively modest' in terms of its impact on the economy and inflation.
King said he was assured that Darling remains committed to the government's fiscal rules, adding that he will be interested to see what offsetting measures are announced by the Chancellor in his pre-budget report this autumn.
The governor noted that the 50 billion pound Special Liquidity Scheme unveiled by the Bank last month has been successful so far in stabilising confidence in the financial sector, but he warned that markets remain fragile.
Paul Tucker, the BoE's executive director of financial markets and a member of the MPC (A050540.KQ - news) , conditions have improved compared with six to eight weeks ago and noted that some risk appetite is returning, notably in the acquisition of assets above fire-sale prices.
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