King says outlook 'uncomfortable'

MPs question Mervyn King at the Treasury Select Committee

Bank of England governor Mervyn King has sounded a downbeat note about the UK economy, warning that growth may slow and inflation was likely to rise.

Higher energy and food prices as well as the continued global credit crunch has made the outlook "uncomfortable", he told the Treasury Select Committee.

"The most likely outcome is for output growth to slow and inflation to rise at least for a period," he said.

Mr King also expressed concern about more problems on the credit markets.

And he announced a new five-week liquidity facility to assure the big banks there will be enough cash in the banking system over the Christmas holiday period.

A global credit crunch has made it difficult for many banks to raise cash - with Northern Rock being the most high-profile victim.

Mr King was appearing before the MPs to discuss this month's inflation report.

He forecast that after the period of uncertainty, growth would return to its long-run average and inflation to its target of 2%, King said.

A fire alarm at the House of Commons temporarily interrupted the hearing.

BBC business editor Robert Peston said that evidence heard from the governor before the interruption was "enough to make grown men weep".

Housing hit?

Turmoil in international financial markets has led to a tightening of credit conditions, particularly for the riskiest borrowers, King said.

This will have a knock-on effect on consumer spending, and in turn, the economy, he said.

"With borrowing more expensive and less easily available, the personal savings rate is likely to rise, leading to slower growth of consumer spending," he said.

Mr King was sceptical about whether sub-prime losses in the US could, on their own, lead to a major market slowdown.

The estimated $200bn hit taken by firms was the equivalent to a 1.5% fall in the US stock market, he added.