Bank of England governor Mervyn King yesterday warned that the next few years are ‘going to be painful’ and that ‘markets would expect a new government to take decisive action’.
At a news conference to deliver the Bank’s quarterly inflation report, King said he had met incoming Tory chancellor Osborne and advised him that cuts will have to start this year.
He said that the agreement ‘that has been reached between the Conservatives and Liberal Democrats is a very strong and powerful agreement to reduce that deficit and to take more action than was embodied in the budget in the Spring’.
King warned that ‘the financial crisis is far from over’.
In his opening remarks, he added: ‘As debt has moved from the financial to the public sector, the banking crisis has turned into a potential sovereign debt crisis.
‘After several months of drift over the problems in Greece, last weekend produced a comprehensive package to stem the risk of contagion to other euro-area countries. That led to a positive market reaction.’
‘But’, he stressed, ‘the underlying problems facing the world economy remain.
‘The window of opportunity afforded by last weekend’s decisive actions must be used to tackle excessive fiscal deficits and rebalance demand by restoring competitiveness where needed.’
Demanding urgent action, King emphasised that ‘it is imperative that our own fiscal problems are dealt with sooner rather than later.’
He further warned: ‘The projected outlook is very similar to that presented in the February Report but with somewhat greater downside risks in the short run, reflecting recent events in financial markets and their implications for demand and output.
‘Despite the downturn in the economy, inflation remains above three per cent.
‘That reflects the temporary effects on inflation of the restoration of the standard rate of VAT to 17.5 per cent, the increase in oil prices over the past year and continuing pass-through from the exchange rate depreciation.
‘Unless repeated, these factors should continue to push up on inflation only for a period.’
But he added: ‘Inflation is likely to remain above target throughout 2010.
‘The near-term outlook is higher because of further increases in the oil price and falls in sterling since February.’
King warned that in the next year ‘the pace and extent of the fall in inflation are highly uncertain, and recent experience suggests that there are substantial risks in both directions’.
Concluding his remarks, he said: ‘Recent events in Europe show that we are only part way through the financial crisis that began three years ago.’
He stressed that ‘the underlying problems will take longer to resolve, both at home and internationally’.
