Bank governor: Britain faces pay cut
Bank of England governor Mervyn King prioritised long-term stability over cuts to take-home pay in a speech in Newcastle last night.
Mr King’s comments came at the end of a day which saw official figures confirm the UK economy started contracting again in the final quarter of 2010.
He said the figures showed that the recovery was set to be “choppy” and said the Bank’s monetary policy committee was more concerned with the “period of uncomfortably high inflation” currently being experienced.
Consumer price index (CPI) inflation rose to 3.7% at the end of 2010 and has averaged three per cent since 2008 – above the Bank’s two per cent target.
“I do not believe we are about to return to the days before independent central banks ushered in a period of price stability,” he told an audience at Newcastle’s civic centre.
“The Bank of England cannot prevent the squeeze on real take-home pay that so many families are now beginning to realise is the legacy of the banking crisis and the need to rebalance our economy.
“But we can determine our own inflation rate in the long run, whatever happens in the rest of the world.”
Chancellor George Osborne blamed the 0.5% contraction in GDP in the final three months of last year on the snowy weather seen in December.
Mr King said that, despite the snow, “growth at home slowed in the second half of last year”.
He said domestic spending faces further headwinds in 2011, with private consumption restrained by a combination of rising unemployment and the squeeze on real take-home pay.
“And fiscal consolidation implies slow growth of public consumption,” he added, referring to the coalition government’s austerity drive.
“The economy as a whole must deal with the legacy of extraordinarily high debt levels built up prior to the crisis.”
Mr King insisted that the long-term outlook appeared positive, with the UK economy “well-placed” to return to sustained growth over the next few years.
“Of course, there will be ups and downs as the squalls from the world economy blow us around,” he acknowledged.
“But the right course has been set, and it is important we maintain it.”
