Mervyn King welcomes coalition plans for deficit action

BANK of England governor Mervyn King yesterday warned that the financial crisis was "far from over" as he heaped unprecedented praise on the coalition government's plans to tackle the UK's debt pile.

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Speaking after the publication of the Bank's quarterly inflation report, King said the deficit problem would take a full parliament to fix.

But he was content that the Conservative and Liberal Democrat blueprint provided a "clear and binding commitment" to tackling the issue.

The Bank predicts that inflation will remain above its 2 per cent target for the rest of 2010. It is then expected to fall below this level and remain under 2 per cent for much of the following two years, even if interest rates remain on hold.

The report also left the door open for further quantitative easing by the Bank.

King, who normally does not comment on the specifics of government fiscal policy, added that the pace and extent of the fall in inflation remain "highly uncertain" and that "recent experience suggests that there are substantial risks in both directions".

On news of the likely fall of inflation below its target in the medium term, the pound surrendered earlier gains in the currency market. David Kern, chief economist at the British Chambers of Commerce, said: "The monetary policy committee is in no rush to raise interest rates.

"British business is still fragile following the recession, and any premature tightening in policy could by very damaging."

Howard Archer, chief UK and European economist at IHS Global Insight, added: "The Bank of England has not yet shut the door on further quantitative easing, although it seems unlikely to occur."

The governor described the UK's two successive quarters of economic growth as "no small achievement". He added that the pick-up is forecast to accelerate in the coming months.

"The recovery is likely to gather pace over the next year, underpinned by the considerable stimulus stemming from the highly accommodative monetary stance, together with a projected further expansion of world demand and past depreciation of sterling," King said.

But this pace will be dampened by substantial fiscal tightening and the need for a more robust banking sector, the inflation report suggested.

In a further slap to the previous government, King said Labour's plan for dealing with UK debt had lacked ambition.

Prior to the election, King reportedly commented that whoever won the poll faced the prospect of being turfed out of government for a generation due to the unpopularity of necessary spending cuts and taxes.

But he appeared to distance himself from the alleged quotes. They needed to be taken with "a big pinch of salt", King said.

He said markets now "need and want a very strong signal" from the UK government.

King said: "I have been told what is in the agreement between the Conservatives and Liberal Democrats this morning and I am very pleased that there is a very clear, binding commitment to accelerate the reduction in the deficit."


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