Page last updated at 05:02 GMT, Wednesday, 20 January 2010

Mervyn King gives warning over UK public deficit

Mervyn King says political uncertainty affected monetary policy

The governor of the Bank of England has renewed his warning to the government that it must cut the public deficit.

Mervyn King said uncertainty about the government's intentions had a direct bearing on monetary policy.

He said "a key element in raising the national saving rate is the elimination over time of the structural deficit in the public finances".

Mr King also warned that inflation was "likely to pick up markedly in the first half of this year".

Referring to the public deficit, he said: "Of course, there is a perfectly sensible debate about the appropriate timing of the withdrawal of the temporary fiscal stimulus as the economy recovers.

"Some has, in fact, already been withdrawn with the return of the standard rate of VAT to 17.5% at the beginning of the month.

There's been talk of a truce between the Bank of England governor and the chancellor
Stephanie Flanders, BBC economics editor

"But uncertainty about how and when fiscal policy will respond has a direct bearing on monetary policy. And markets can be unforgiving."

During his speech, Mr King quoted the US Federal Reserve Chairman Ben Bernanke.

Speaking about the fiscal position in the US, Mr Bernanke said: "Near-term challenges must not be allowed to hinder timely consideration of the steps needed to address fiscal imbalances.

"Unless we demonstrate a strong commitment to fiscal sustainability in the longer term, we will have neither financial stability nor healthy economic growth."

Inflation rise

Mr King said that Chancellor Alistair Darling "has made clear that the spring Budget provides the opportunity to do precisely that".

He added that inflation was "likely to rise to over 3% for a while", and that it could go even higher if energy prices and indirect taxes were to increase further.

However, he said inflation "should return to target in the medium term".

UK inflation rose at its fastest annual pace for nine months in December.

The Office for National Statistics said the Consumer Price Index (CPI) measure of inflation had risen to 2.9%, up from an annual rate of 1.9% in November.

BBC chief economics correspondent Hugh Pym said Mr Darling has said in a newspaper interview that plans to halve the deficit are non-negotiable.

So Mr King's remarks may have been aimed as much at number 10 Downing Street, as number 11, our correspondent added.

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