INFLATION will remain stubbornly sticky until at least the end of 2015, the outgoing governor of the Bank of England cautioned yesterday, though the economy will experience a “modest and sustained” recovery.
Delivering his final quarterly inflation report before handing the reins to Canadian Mark Carney, Sir Mervyn King said growth will be “a little stronger” than previously hoped – “the first time I have been able to say that since before the financial crisis”.
His tone was markedly more upbeat than three months ago and follows surprise gross domestic product (GDP) growth of 0.3 per cent in the first quarter of last year.
King also launched a surprise attack on plans for a pan-European financial transaction tax and said even central bankers in Europe doubt it will work. He criticised the European Commission’s plans to impose a tax on buying and selling financial instruments such as shares, bonds and derivatives, which could raise some £30 billion a year.
King joins critics including Chancellor George Osborne who warn the so-called “Tobin tax” will drive business away from the City.
Yesterday’s inflation report forecast that economic growth should pick up to 0.5 per cent in the second quarter but it warned that the hangover from the financial crisis would ensure the recovery is weak and uneven.
Rising energy and food bills and higher tuition fees will continue to heap pressure on cash-strapped consumers but King said inflation will be “a little weaker” than the Bank previously expected in February.
However, it sees inflation peaking at 3.2 per cent after the summer and unlikely to fall below its 2 per cent target until the first quarter of 2016.
The Bank typically sets monetary policy with the aim of ensuring inflation has returned to its 2 per cent goal within three years, although the Chancellor has now encouraged rate-setters to take a flexible approach.
Carney – due to take over from King in July – is also a fan of long-term interest rate guidance to stimulate the economy. King said: “This hasn’t been a typical recession and it won’t be a typical recovery. Nevertheless a recovery is in sight.”
The Bank argued that economic stimulus, including its credit-boosting Funding for Lending scheme (FLS) and £375 billion of quantitative easing (QE), would support the recovery and get households and businesses spending again, although it added that the main risks continue to come from abroad.
Analysts had been expecting a bullish final report from the departing governor. Marcus Bullus, trading director at MB Capital, said: “With one eye on his legacy and one on the economy, the temptation to look for positives must have been overwhelming. He assured us once again that the ‘recovery is in sight’. It is, if you are peering through the Hubble space telescope.
“The governor’s prediction that the bank [lending] rate will remain below 1 per cent for at least four years hardly hints at confidence. The Bank’s loose monetary policy is clearly unlikely to change any time soon, and its inflation targets will be quietly ignored until things improve.”
David Kern, chief economist at the British Chambers of Commerce, said the positive trends outlined within the report appeared to be “too optimistic”.
He added: “[We] believe the speed of the recovery will be somewhat slower than the governor indicated.”