Biggest challenge in a decade, says King

Jan 23 2008 by Peter McCusker, The Journal

BANK of England chairman Mervyn King has warned that 2008 will pose the UK its greatest economic challenge in a decade.

In a speech to the Institute of Directors in Bristol last night, he said that economic activity could slow quite sharply in the short term as consumers save more of their income.

Mr King was speaking after the FTSE 100 Index suffered its biggest one-day points drop since the September 11 terrorist attacks.

He told the meeting: “The next year will pose economic challenges for all of us – more so than at any time since the Bank of England was given its independence in 1997.”

He called for Britons to save more of their money and issued a warning that the Government’s spending levels could not continue.

“For some years we have been able to finance current account deficits by borrowing, often through banks, at unusually low interest rates on world capital markets,” he said.

“Such borrowing is now becoming more expensive.

“Unless we spend less and save more, our current account position will deteriorate.”

The governor said that consumers were likely to see higher prices for food and energy this year, possibly pushing inflation over 3%.

He added: “It is possible that inflation could rise to the level at which I would need to write an open letter of explan- ation, possibly more than one, to the Chancellor.”

Mr King is required to write to Chancellor Alistair Darling if inflation goes above 3% or falls below 1%.

The governor accepted there was little that could be done to avoid some rise in inflation in 2008 but said the bank’s Monetary Policy Committee (MPC) was determined to keep it below the target of 2% in the medium term.

He also appeared to open the way for an interest rate cut from its present level of 5.5% when the MPC holds its next meeting on February 6 and 7.

And he predicted that a “less buoyant” housing market would go hand in hand with slower consumer spending growth in 2008.

He said: “Tighter credit conditions mean that, as a nation, we are likely to save more of our income this year than in the recent past.

“In the short run, that will slow economic activity, possibly quite sharply.”

Sarah Green, regional director of the CBI in the North-East, said: “The dilemma the Bank faces over interest rates is to weigh risks of a slowdown with the real and present pressure on prices in both factories and other areas of the economy.

“Price pressures from oil and food costs will bring higher inflation in the short term and may push the inflation rate further above target during 2008, making the Bank’s decision even more difficult.”

James Ramsbotham, chief executive of the North-East Chamber of Commerce (NECC), said: “Clearly there is turbulence in the financial markets abroad but the FTSE was back up yesterday and the picture here in the North-East is a positive one.

“NECC’s latest quarterly economic survey showed firms in this region have strong order books and a high level of confidence for the coming months. .”

The FTSE 100 bounced back yesterday after the US Federal Reserve cut interest rates in America by three-quarters of a point.

It closed at 5740.1, a 3% increase on the previous day, dubbed Black Monday.

Partial rebound on Wall Street

AN unusual emergency interest rate cut by the US Federal Reserve gave Wall Street a partial rebound yesterday from a precipitous early decline – and perhaps the first steps toward a long-term recovery.

The rest of the comeback, for the economy as well as the stock market, may depend on a turnaround in the battered housing market and renewed confidence among US consumers.

US stocks began the day following the lead of markets abroad that had plummeted for two days in a row.

Fears of a US recession – that would spread to other economies – had investors fleeing stocks worldwide.

The Fed moved before the opening of trading, cutting its benchmark federal funds rate by 0.75 of a point.