Bank chief says UK rates will take time to normalise
Published 29/07/2010 | 05:00
THERE may be a considerable way to go before UK interest rates return to normal, Bank of England Governor Mervyn King said, as an influential analyst warned of the risk of a "double dip".
Mr King told MPs in London he looked forward to that time because it will probably be a signal that the economic outlook is improving in a durable way.
"I fear there is some considerable distance to travel before we can begin to use the word 'normal,'" he said.
The leading economic thinktank, the National Institute of Economic and Social Research (NIESR) said yesterday that the 1.1pc growth reported for the second quarter was a "blip" and might not be sustained for the remainder of the year.
This follows the 2.8pc growth in Irish GDP reported for the first quarter of the year. Sustaining that will require continuing growth in Ireland's main markets in the UK, USA and eurozone.
"We would advise the Bank of England to make no change (in interest rates) at the next few meetings as they assess whether this robust growth persists," the NIESR said.
Mr King told the parliamentary hearing that the bank's monetary policy committee (MPC) faces a difficult challenge in balancing risks to growth and inflation. "We judge that, at present, it is right to keep our foot firmly on the accelerator in order to stimulate the economy."
"I still think the next move by the Bank of England will be to tighten policy, but that will be in probably the second quarter of next year at the earliest," NIESR senior economist Simon Kirby said. "But clearly there are risks around the forecast.
"We shouldn't automatically rule out the chance of a quarter or two of output actually contracting in the UK over the next couple of years."
MPC members are beginning to disagree on interest rates as inflation remains above target. At its last meeting, Andrew Sentance said it was time to raise the benchmark rate from a record low of 0.5pc.