Bank governor warns against give-away Budget
Mar 25 2009 by Alun Thorne, Birmingham Post
Mervyn King, governor of the Bank of England, warned the Government against a give-away “stimulus” Budget yesterday after official numbers astonished economists by showing that inflation rose in January, confounding widespread expectations that it would continue to fall.
Writing to Chancellor Alistair Darling to explain why inflation – up to 3.2 per cent in February from 3.0 per cent in January – was still more than a full percentage ahead of the Bank’s two per cent target, Mr King insisted that he still expects inflation to fall rapidly in the coming months as energy companies cut their bills, spare capacity opens up in the economy and international demand slips further.
“As a result of these factors, and notwithstanding the inflation outturn for February, it is likely that over the next year CPI inflation will move below target,” he wrote.
Giving evidence to the Treasury Select Committee, Mr King dismissed fears of a medium-term revival of inflation. “Even if we see a significant pass-through of the depreciation of sterling, it may means inflation is close to the target rather than below it,” he said. “I don’t see a large risk of inflation being significantly above it.”
The Bank’s unprecedented policy of creating money to buy government bonds from financial institutions, known as “quantitative easing”, was intended to counter “the substantial risks of undershooting the two per cent CPI target in the medium term”, he told the committee.
But the governor warned that the Government’s finances are now so stretched that there is no room to reinforce the Bank’s efforts with a generous Budget on April 22 that ratchets up Government borrowing still further.
“Given how big those deficits are, I think it would be sensible to be cautious about going further in using discretionary measures to expand the size of those deficits,” he said.
“The level of the fiscal position in the UK is not one that would say ‘Well why don’t we just engage in another significant round of fiscal expansion?’.”
Prices as measured by the Consumer Prices Index jumped quite sharply by 0.8 per cent between January and February. Cuts in mortgage interest – which do not count towards the CBI – mitigated the increase to 0.6 per cent in the Retail Prices Index.
But the RPI, used as the benchmark for state pensions and other benefits and traditionally by many pay negotiators, still failed to meet widespread predictions that it would go into reverse over the year to February. It came out precisely unchanged from last February last year – still lower than in any month since March 1960.
The biggest single factor in last month’s inflation was a 1.7 per cent rise in food prices, particularly those for fresh vegetables.
These left prices for seasonal foods generally 16.8 per cent higher year on year, the biggest annual increase since May 1992.
A 3.2p per litre increase in the average price of petrol, against a rise of only 0.1p last February, also drove up the overall cost of transport.
Overall, services cost 6.0 per cent more than a year earlier, down from a 6.9 per cent increase in January.
But inflation in the price of goods generally rose to 1.2per cent year on year from just 0.1 per cent in January, reflecting the fall in the value of the pound.
