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| Economic trials ahead - Bank boss | |
| (about 4 hours later) | |
| The governor of the Bank of England, Mervyn King, has warned that the UK economy faces its toughest challenges since 1997. | The governor of the Bank of England, Mervyn King, has warned that the UK economy faces its toughest challenges since 1997. |
| The UK faced "a period of above-target inflation and a marked slowing in growth", he told business leaders. | |
| Mr King spoke after the US Federal Reserve slashed interest rates to 3.5% from 4.25% in a surprise move that saw global markets recover some ground. | Mr King spoke after the US Federal Reserve slashed interest rates to 3.5% from 4.25% in a surprise move that saw global markets recover some ground. |
| His comments suggest that UK rates will not come down by much, say analysts. | His comments suggest that UK rates will not come down by much, say analysts. |
| 2008 is likely to see higher energy prices, higher food prices and higher import prices Mervyn King, Bank of England chief | 2008 is likely to see higher energy prices, higher food prices and higher import prices Mervyn King, Bank of England chief |
| BBC's Business Editor Robert Peston said that Mr King's speech to Institute of Directors members in Bristol was the gloomiest he had heard from the Bank of England governor. | |
| "It means it's going to be a pretty difficult year with slowing economic growth, unemployment rising but the cost of money not coming down as much as businesses and consumers would like," he said. | "It means it's going to be a pretty difficult year with slowing economic growth, unemployment rising but the cost of money not coming down as much as businesses and consumers would like," he said. |
| Balancing act | Balancing act |
| The Bank of England's rate-setting Monetary Policy Committee will meet on the 6 and 7 February to decide on the direction of interest rates from their current level of 5.5%. | The Bank of England's rate-setting Monetary Policy Committee will meet on the 6 and 7 February to decide on the direction of interest rates from their current level of 5.5%. |
| It confirmed it would not be making a decision before that, as the US central bank, the Fed, did on Tuesday to bolster confidence in the US economy, which is the world's largest. | It confirmed it would not be making a decision before that, as the US central bank, the Fed, did on Tuesday to bolster confidence in the US economy, which is the world's largest. |
| Many analysts expect a rate cut at the MPC's next meeting, but Mr King's inflation concerns will prevent the Bank from making as dramatic a reduction over the coming months as the US has done. | Many analysts expect a rate cut at the MPC's next meeting, but Mr King's inflation concerns will prevent the Bank from making as dramatic a reduction over the coming months as the US has done. |
| He warned that "2008 is likely to see higher energy prices, higher food prices and, with a lower exchange rate, higher import prices, pushing inflation above the 2% target". | He warned that "2008 is likely to see higher energy prices, higher food prices and, with a lower exchange rate, higher import prices, pushing inflation above the 2% target". |
| And he said he it was "possible" that consumer price inflation - measured by the Consumer Price Index (CPI) - would rise to 3% or more. | And he said he it was "possible" that consumer price inflation - measured by the Consumer Price Index (CPI) - would rise to 3% or more. |
| This would mean he would need to write a letter of explanation to the Treasury, possibly on more than one occasion. | This would mean he would need to write a letter of explanation to the Treasury, possibly on more than one occasion. |
| Mr King is obliged to inform the government in a letter when inflation is more than one percentage point above the government's inflation target of 2%. | Mr King is obliged to inform the government in a letter when inflation is more than one percentage point above the government's inflation target of 2%. |
| Expensive borrowing costs | Expensive borrowing costs |
| On the other hand, Mr King warned that problems in the banking sector relating to huge losses as a result of soured investments in US sub-prime home loans mean businesses and consumers would face higher borrowing costs for the foreseeable future. | On the other hand, Mr King warned that problems in the banking sector relating to huge losses as a result of soured investments in US sub-prime home loans mean businesses and consumers would face higher borrowing costs for the foreseeable future. |
| "It is likely that a less buoyant housing market will go hand-in-hand with slower growth of consumer spending," he said. | "It is likely that a less buoyant housing market will go hand-in-hand with slower growth of consumer spending," he said. |
| "Tighter credit conditions mean that, as a nation, we are likely to save more of our income this year than in the recent past. | "Tighter credit conditions mean that, as a nation, we are likely to save more of our income this year than in the recent past. |
| "In the short run, that will slow economic activity, possibly quite sharply. And there is a risk that weaker activity and lower asset prices could result in another round of losses for banks and a further tightening of credit conditions." | "In the short run, that will slow economic activity, possibly quite sharply. And there is a risk that weaker activity and lower asset prices could result in another round of losses for banks and a further tightening of credit conditions." |