The UK will avoid a double-dip recession if the global climate remains healthy and the pound stays competitive, Bank of England MPC member Andrew Sentance told the British Property Federation’s housing conference this morning.
The pound rallied after the speech where Sentance hinted that the Bank of England Monetary Policy Committee (MPC) would be set to tighten up policy.
“Through the recession, the MPC had been right to relax monetary policy aggressively to provide support for a recovery which is now emerging. But as the recovery develops, the economic situation will change and the MPC must be ready to adapt its policies to the changing economic situation over the course of the recovery -- just as we have done through the recession.”
Speaking at the British Property Federation’s annual housing conference in London, he told delegates the recovery would have to fight through cuts in public spending resembling 1990s levels and the banking recovery. The deficit widened to 15.7 billion pounds in December, the most for that month since records began in 1993.
Although Chancellor Alistair Darling celebrated positive GDP figures yesterday as Britain finally climbed out of its longest and deepest recession, Sentance warned that GDP statistics were only a small measure of recovery. He said: "The pace of any tightening of monetary policy will depend very much on the recovery... We will be assimilating very closely the evidence from all sorts of data. My view is that provisional estimates of GDP are one factor among a wide range."
He added that the recovery “started earlier and may have been stronger” than indicated by the Office for National Statistics’s GDP figures which yesterday showed the economy had grown by 0.1 percent in the fourth quarter of last year, ending the six-quarter recession. The figure however, was less than almost any economist had predicted.
While the two main political parties have been split over the timing of cuts which are widely accepted on both sides, he implied that the pace and scale of cuts would have an important bearing in interest rate policy.
“There is a risk that fiscal policy is tightened more aggressively after the election,” Sentance said, “or that the sheer scale of the deficit acts as a bigger drag on private spending, because of the fear of future tax rises and/or spending cuts. However, these concerns should not be overplayed.”
The International Monetary Fund yesterday said the recovery was still fragile as it raised its forecast for global economic growth this year to 3.9 percent from an October projection of 3.1 percent
Sentance said he was concerned about “the limited extent to which service price inflation had fallen during Britain's recession” adding the pound’s weakness was stoking inflation.
“In current circumstances, we cannot rely on goods deflation to hold down the U.K. inflation rate -- particularly while the impact at sterling’s depreciation feeds through. While the combination of above-target services inflation and rising import prices persists, it will be difficult for the MPC to keep inflation on target.”
Inflation jumped by 1 percentage point in December to 2.9 percent, while the pound has fallen by 17 per cent since 2007. The jump was the biggest since records began in 1997, and it exceeded the bank’s 2 percent target for the first time since May. Sentance said the 2.6 percent inflation rate for services may “need to fall back further” to offset goods inflation.
The Bank of England is set to make a decision next week over its £200bn bond-purchase programme.
Sentance said that the key to recovery in the housing market would be the banking system. He said the housing market had
“begun to recover, both in terms of activity and prices,” adding “if the pressures in the banking system ease over the next couple of years, there could be scope for a much stronger recovery in the housing market, especially if interest rates remain low and monetary conditions remain as relaxed as they are at present.”
The worst of the employment has also passed.
“Business surveys suggest that the margin of spare capacity within firms is not as high as we might expect,” he said. “There may be less labour market slack at present than at the equivalent stage of the early 1980s and early 1990s recoveries.”
Claims for jobless benefits declined 15,200 to 1.61 million last month, the fastest drop since April 2007.
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