BoE´s King says recent developments have helped support domestic demand UPDATE
Wednesday, February 15, 2006 11:54:24 AM
afxpress.com
BoE's King says recent developments have helped support domestic demand UPDATE (Updating to add further details)
LONDON (AFX) - Mervyn King, the governor of the Bank of England, said developments since the November Inflation Report have helped support UK domestic demand
Speaking after the BoE's latest economic projections, King said low long-term interest rates have contributed to a rise in asset prices, both at home and overseas, and noted that the housing market has picked up in terms of both prices and activity and that broad money growth has hit a 15-year high
"These developments are likely to support domestic demand," he said. The slowing of consumption growth over the last year or two, he added, appears to have been "relatively short-lived"
The BoE is projecting that UK GDP growth to "pick up slightly above" its historical average over the next 12 months as the weakness seen through most of 2005 drops out of the comparison. Most economic forecasters, however, still think the economy will grow below its long-run average this year
Overall, King said today's Inflation Report contains a "benign" central view of steady economic growth and a flat inflation profile around the 2.0 pct target
However, he urged sterling markets not to get carried away by the inflation projections and stressed the risks to the forecast, in particular domestic gas prices
"Let me remind you that the chance that inflation will remain so close to the target throughout the forecast period is negligible," he said
"As ever, there are risk to the outlook in both directions, and it is an assessment of those risks which determines the Committee's thinking about the policy decision," he added
King also expressed concerns about the path of business investment, saying that he would have expected it to recover more quickly than it has
He added that higher energy costs, in particular the spike up in domestic gas prices through last year, may have delayed company investment decisions and frittered away a large chunk of savings garnered from restructuring measures
King noted that both survey and official data paint a relatively weak investment picture but added that the BoE still projects a "relatively modest recovery" over the coming forecast period
The governor said a pick-up in business investment is necessary to rebalance the gap between the external and domestic sectors of the UK economy but stressed that it's not the job of the central bank to engineer that. The trade in goods and services deficit during 2005 accounted for 3.8 pct of UK GDP
Though that's not as big as the shortfall in the US, King said it's "still pretty big" and "certainly not trivial"
King believes the rebalancing will occur at some stage but ruled out cutting borrowing costs to spur investment as that would prompt a renewed burst in consumer spending |
