Thursday, 16 February 2012

UK Inflation Report

Sir Mervyn King has got his mojo back

Biff! (Photo: Bloomberg)
Sir Mervyn King hasn’t looked so relaxed for ages. The Bank of England Governor even found time at the Inflation Report press conference to quip, when asked whether he had trouble sleeping given the risks in the economy, that he’d “given up not sleeping at night and decided to sleep instead”.
When he wasn’t cracking jokes, he was hitting back at his critics and claiming bullishly that Britain was light years ahead of the rest of the developed world in dealing with its problems.
“We said that inflation would come down. It is coming down,” he said. “Certainly, those people who said [money printing] would lead us down the path of the Weimar Republic and Zimbabwe have been proved wrong.” Biff. One in the solar plexus for those testy economists.
“More than any other advanced economy, we are in the position that we’ve put in place the conditions that are needed to make that big adjustment,” he continued. “There is a credible medium-term fiscal plan to put our deficit in shape and to get back to a point where the ratio of national debt to GDP can begin to fall back.” Boff. One on the chin for the US and the awkward squad in the eurozone.
Coming on the back of a year in which Sir Mervyn endlessly reminded us all how terrible life would be (sharpest decline in living standards since the 1920s, seven lean years, that kind of thing), this was a Governor not just in high spirits but on fighting form.
The fall in inflation from 4.2pc to 3.6pc last month and the Bank’s outlook that it will be below 2pc before the year-end was probably behind his good mood. Having written nine letters in a row to the Chancellor to explain why inflation was so far above target, the last being on Monday, he has the genuine prospect of putting down his pen for a while now.
Declining inflation will allow the Bank – and the Governor – to justify its decision not to tackle high inflation by raising rates. And as it falls, the pressure on household finances will ease – so clearing the Governor’s conscience of the one ill side-effect of the Bank’s policy. “The ease on real incomes is already being seen,” he even ventured.
Beyond that, though, there was not much good news for the rest of us. The recovery will be “a zig-zag pattern of alternative positive and negative quarterly growth rates”. The right policy may be in place to get Britain back on track, but it will “take a long time”. The euro crisis still poses an unknowable risk and, even if the problems are contained, the UK will face headwinds to growth. Households will also have to face up to “a marked reduction in their future earning prospects”.
There is little more that policy can do to get the recovery motoring, either. Sir Mervyn pointed to the “automatic stabilisers”, the benefits that kick in to help those who lose their jobs, for example, and “supply side reforms”, roughly translated as improving taxes and regulations to encourage businesses to hire and invest. Hardly the big economic kick desired.
“Patience is a virtue I would urge on all of us,” he said. Rates look like remaining at 0.5pc through to March 2014 and there may even by more quantitative easing on top of the £325bn committed already.
Waiting for the recovery may be made easier by low borrowing costs and improving family finances, but that’s about as optimistic as the Governor suggested we can get.

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