Mervyn King warns that tough times are on the way and there is little the Bank of England can do about it.
His comments on rising inflation and falling growth sound like he's worried about the spectre of stagflation (a la 70's) In this scenario interest rate cuts (which King seems against anyway) are a double edged sword which could lead to calamity........
The Times October 12, 2005
Bank cannot avert downturn, warns King By Gary Duncan, Economics Editor
THE Bank of England's Governor braced Britain for tougher economic times last night as he sounded a warning that the Bank could not stave off a downturn triggered by soaring oil prices
Mervyn King admitted that the Bank's Monetary Policy Committee had been caught off guard by an abrupt fall in growth and a sharp acceleration in inflation this year.
He emphasised the dilemma that the Bank faced from these conflicting pressures. Steeling the nation for economic turbulence, he suggested that those hoping that the MPC could resolve all of the economy's problems with interest rate cuts would be disappointed.
"The MPC has been surprised by both the slowdown and the rate at which inflation has picked up," Mr King told business leaders in Newcastle.
But in a blunt warning, he said: "Expectations of its ability to stabilise the economy must be realistic. The adverse effect of the rise in the oil price on consumers' purchasing power cannot be avoided . . . There has grown up in recent years a false sense of our ability to maintain a smooth and steady growth rate of output."
Mr King said that from 1992 the economy's performance "might be characterised as the Great Stability". This had fostered a view that the Bank could guarantee continuous steady growth.
But the Governor said such a belief was false. "The business cycle has not been abolished," he said. He pointed to his earlier warnings that the Bank's past strategy of stimulating consumer demand to boost growth "carried the risk that there could be a sharp correction to . . . consumer spending".
That risk had now materialised. "With the additional impact of higher oil prices, real disposable incomes are rising more slowly, and the long-awaited rebalancing of the economy away from consumer spending to business investment and net exports is underway," he said. But the Bank must also contend with inflation which would "for a short while be above target". "Both inflation and output may be somewhat more volatile than the calm waters to which we had become accustomed," he said. "And the MPC can do little to change that."
In comments that will further dent hopes of rate cuts, the Governor also said that less than half the recent rise in inflation could be blamed on oil.