Thursday, May 15, 2008

A smidgen of reality at the Bank of England

B of E Governor Mervyn King delivers a bleak message at the same time when Gordon Brown is upbeat and optimistic. I don't know if I should be happy or sad, but it is certainly refreshing to see a central banker telling it like it is. King's comments are in stark contrast to that of the Federal Reserve, which is obviously more concerned with Wall Street than it is with Main Street.

"The 'nice' decade is behind us," he said. "The credit cycle has turned. Commodity prices are rising. We are travelling along a bumpy road as the economy rebalances. Monetary policy cannot and should not try to prevent that adjustment. Inflation will return to the target and growth will eventually recover to a sustainable rate. But we will have to be patient."

"Rising energy and import prices will almost certainly push inflation up further, possibly significantly, in the coming months," he said. "As those price increases feed through to household bills, they will lead to a squeeze on real take-home pay which will slow consumer spending and output growth, perhaps sharply. It is quite possible that at some point we get an odd quarter or two of negative growth. Recession is not the central projection but clearly further shocks could push us in that direction."

source: Bank of England dashes hopes of interest rate cuts amid inflation threat
By David Litterick, The Daily Telegraph

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