Bank boss warns of fragile recovery

Mervyn King: Consumer spending likely to slow

by Myles Neligan BBC News Online reporter at the BCC Conference

Bank of England deputy governor Mervyn King has warned a gathering of UK bosses not to count on a full-blown economic revival just yet.

Mr King said on Tuesday that low levels of business investment and declining consumer spending could hinder a recovery in the months ahead.

"The recent news has been encouraging. It is still too soon though to be confident that recovery is entrenched," he told the British Chambers of Commerce annual conference.

His remarks followed a survey from the Confederation of British Industry showing that manufacturing confidence had risen for the first time in two years.

Rate outlook

Mr King, who sits on the BoE's interest rate-setting monetary policy committee, said the level of rates in the months ahead would depend on changes in average wages, oil prices, and the value of the pound.

However, he added that recent explosive growth in consumer spending and house prices is likely to slow, partly as a result of tax increases announced in Chancellor Gordon Brown's budget last week.

Persistently high levels of consumer spending, seen as evidence of inflationary pressure, have been the main deterrent against steeper interest rate cuts for the past year.

The Bank of England, charged with keeping inflation within one percentage point either way of the government's 2.5% a year target, cut rates to their current 40-year low of 4% last year in a bid to ward off recession.

But most economists expect them to start rising in the second half of the year as economic growth starts to pick up.

Applause

Earlier on Tuesday, shadow chancellor Michael Howard drew applause from BCC delegates when he berated the government for introducing a range of complex employment taxes and credits, and failing to cut red tape.

However, he declined to commit the Conservative party to simplifying payroll administration by merging national insurance and income tax.

"We're not in committing mode at the moment," Mr Howard told the conference.