Page last updated at 11:04 GMT, Thursday, 11 September 2008 12:04 UK

No let-up in inflation warns King

Mervyn King warns of continuing tough times ahead

The Governor of the Bank of England has warned MPs that inflation, now at 4.4%, is set to exceed targets once again.

Mervyn King said "it would not be surprising" if he had to write to the chancellor next week explaining why inflation had exceeded targets of 2%.

He added all advanced economies were facing "testing times", but he saw no reason why the UK could not cope.

However, Mr King also warned there was no quick fix for the current mortgage crisis affecting the economy.

He last wrote to Alistair Darling in June, when he warned it was the first of many letters he was likely to have to write - explaining why inflation was beyond the government target - over the coming year.

"In the UK, we face a difficult but temporary period during which inflation will remain high for a while but output growth, at best, weak," he said.

He said it would be surprising if he did not have to write to the chancellor next week.

Economic woes

"But provided we do not impede the required adjustment we will come through this temporary period and resume a path of normal economic growth with inflation close to target," he added.

A Bank of England survey - released just ahead of the Treasury Select Committee - indicated that UK consumers expect inflation to reach 5.4%, the highest level since the survey was first carried out in 1999.

Meanwhile, some forecasts are predicting that the Consumer Prices Index measure of inflation will surge to 5% from its current level of 4.4% when figures are released next week.

And with inflation moving higher, the Bank is facing a difficult balancing as it has to weigh rising inflation against slowing economic growth.

Many analysts expect the UK economy to sink into recession during the current year - a recession is defined as two negative quarters of economic growth in a row.

Recent reports from both the European Commission and Organisation for Economic Cooperation and Development have offered a gloomy outlook warning the UK is likely to slip into recession soon.

Lending concerns

Turning to the current credit crunch, Mr King explained the central bank was not in a position to provide long-term liquidity to aid the mortgage market and boost lending.

He added that special measures to help the industry earlier this year "will not and cannot solve the shortage of funding to finance bank lending, including mortgage lending".

"Only private savers or taxpayers via the government can provide such funds," he added.

The Bank is due to unveil new plans for a permanent successor to its current Special Liquidity Scheme which lets lenders swap potentially risky mortgage debts for secure government bonds.





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