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Mervyn King fires recovery warning

Bank of England’s governor outlines concerns on Britain’s economic prospects

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Mervyn King, governor of the Bank of England, warned on Tuesday evening that Britain’s “reluctant recovery” could yet become “recalcitrant”.

Efforts to rebalance the economy and bring down public borrowing levels are credible and essential to improving matters but the UK’s prospects are clearly bound up with those of countries in Europe and Asia, he told an audience in Liverpool.

He explained that the expansion of quantitative easing (QE) this month was carried out with a view to stimulating demand in the UK economy in the short term but he insisted that both the domestic and world economies will need to change radically in the interest of long-term prosperity.

Many of the lessons of the financial crisis are yet to be learned, he said, pointing to the fact that sovereign debt levels in Europe and elsewhere continue to rise several years on. In China, excessive foreign exchange reserves present a different but interrelated challenge, he said.

“There is a long journey ahead before the world economy returns to a sustainable equilibrium, involving rebalancing and a reduction of debt burdens,” he said.

Turmoil in the euro area presents the greatest threat to Britain’s recovery and it is crucial for us and them that steps are taken to recapitalise the region’s banks and to restore the fiscal credibility of individual nations, King said.

“Transparent recognition of losses and a substantial injection of additional capital are necessary to restore market confidence,” he said of the ongoing euro area crisis.

“Four years into the crisis, it is surely time to accept that the underlying problem is one of solvency not liquidity – solvency of banks and solvency of countries, “ King said in his speech delivered at an Institute of Directors event at St George’s Hall.

Short term measures are only effective in buying time for policy makers to address more deep rooted issues, he warned.  

King also took the opportunity to reiterate his belief that the UK’s headline inflation level will fall back in 2012 as the impact of rising energy prices and VAT subsides. Official figures released earlier on Tuesday put the consumer price inflation at 5.2 percent, well above the Bank of England’s target level of 2 percent.

“It is the outlook for inflation, rather than its current rate, which explains the monetary policy committee’s decision to resume asset purchases,” he said.


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