Bank governor upbeat on economy

Sir Edward said a slowdown was not inevitable

A sharp fall in consumer spending and a slump in the housing market are not inevitable, the Governor of the Bank of England has told bankers in Glasgow.

Sir Edward George gave an upbeat assessment of the economy when he addressed the Chartered Institute of Bankers in Scotland.

He suggested that low borrowing costs and a "robust" labour market could help to avoid the fall in consumer spending predicted by many analysts.

The possibility of a sharp rise in unemployment depends substantially on a sharp slowdown in consumer spending rather than the other way round

Sir Edward George

He said economists had forecast that rising household debt and house prices would lead to a downturn in demand.

But he argued that it was not obvious that the household sector would suddenly "run for cover" in the current environment.

'Fact of life'

Sir Edward said: "Uncertainty is a fact of economic life.

"But I do say that it would be unwise - as some have implied - to set monetary policy on the basis of the worst possible outcome, even if one knew what that would mean in policy terms."

He said many economists forecast that rising household debt and house prices would lead to a downturn in demand but this assumed rising unemployment and ignored low debt costs.

"The possibility of a sharp rise in unemployment depends substantially on a sharp slowdown in consumer spending rather than the other way round.

"Similarly, a sharp rise in interest rates is less likely if consumer spending is slowing down.

Relative optimism

"So it is not obvious to me at least that the household sector will suddenly run for cover in the current environment, where the labour market remains remarkably robust, and the prospect for inflation - and hence the prospect for interest rates - remains relatively benign."

Despite the relative optimism, Sir Edward did not rule out changes to interest rates but said recent reports by the Bank of England's Monetary Policy Committee predicted growth in line with inflation.

He said: "I give you my assurance that, despite the fact that we have not changed interest rates now for over a year, we stand ready to do so at any time if and when we see the risks to our central expectation beginning to crystalise in either direction."

In terms of the UK's export market, he said several indicators, including a robust US economy and the recovery of the euro, pointed to continuing steady growth.

Sir Edward, who is due to step down from his post in June, also received an honorary fellowship of the banking institute during the reception.