Weaker pound 'protected UK economy'

Sir Edward retires at the end of the week

The fall in the value of the pound has helped to cushion the UK economy from global economic difficulties over the last year, outgoing Bank of England governor Sir Edward George has said.

Sir Edward, who retires at the end of the week, said the worldwide economy had suffered two setbacks over the past year in the shape of the Iraq war and the fallout from corporate scandals in the US.

But, speaking at his final Treasury Select Committee meeting on inflation, he said that while the UK was inevitably affected by these "we have a bit of a cushion from the weakness of the exchange rate".

After a period of strength, the pound has fallen since the end of 2002 and is down 6% against the euro in 2003.

'Right direction'

Sir Edward said the pound has "moved in the right direction" for euro entry but said no one can come up with a precise number for the right entry level for sterling into the euro as "it is not a precise science".

"I said very explicitly the strength of sterling's exchange rate against the euro was an immediate obstacle", he said.

"Since that time the euro has recovered and sterling has declined... it has moved in the right direction."

Sir Edward also said the recent rise in world stock markets was "a very positive thing", although the global recovery had come later than initially predicted.

He said there was some evidence of an improvement in consumer confidence in the UK and US but added: "We are not getting hugely excited about it. We see the world economic recovery as fairly gradual to around trend rather than a boom."

The governor said he felt it was very unlikely the UK economy would fall into deflation.

Sir Edward said: "I think it's an extremely low risk here. It's an extremely low risk in the United States and it's even a pretty low risk in the eurozone."