King hints at further interest rate cuts
More interest rate cuts could be in the pipeline, according to hints from the governor of the Bank of England Mervyn King today.
The Bank’s quarterly Inflation Report points to inflation dropping over 2009 – from the current high of 5.2 per cent to below the government target for the consumer prices index (CPI) of two per cent and staying low until 2011.
The report also highlighted the danger of deflation – or falling prices – as oil prices drop and so enables the monetary policy committee to drop interest rates further.
Mervyn King, governor of the Bank of England, said: “Since the August report the economic landscape has changed.
“The economy probably entered recession in the second half of 2008 and output is likely to contract further.”
He predicted CPI inflation will fall to “materially below” the two per cent in 2009 and the Retail Prices Index (RPI) could become negative.
Mr King also warned “uncertainties were unusually large” given the lack of historical precedent.
The governor of the Bank of England also admitted the monetary policy committee (MPC) was prepared to cut interest rates further if it was needed to keep inflation to target.
Mr King told reporters: “For some time the MPC has been facing a balancing act between the short and medium term.
“Over the past 3 months, the prospects for inflation have fallen substantially on the downside. To return inflation to target it was necessary to cut interest rates.”
Turning the economy, the Inflation Report shows there is a chance a recession could last to the end of 2010.
However, the most likely outcome is for GDP growth to return in late 2009.
