King warns of 'real risks' to economy

Wednesday, 13 August 2003 12:00 AM

Mervyn King today warned there is some uncertainty surrounding the Bank's forecasts for inflation and growth due to the 'real risks' currently threatening the economy.

Mr King told a press conference that the sluggish recovery of the world economy and the resilience of consumer spending and house price inflation at home present significant challenges going forward.

The governor of the Bank of England was commenting as he presented the Bank's quarterly Inflation Report.

The report sets out the economic analysis and inflation projections on which the Bank's Monetary Policy Committee (MPC) bases its interest rate decisions and includes an assessment of the prospects for UK inflation over the next two years.

Mr King revealed: 'Once again, the central projection is for growth to be close to trend and inflation close to the target.'

However, he stated: 'there are real risks - on both sides of the central projection.'

The Committee's forecast for inflation is that it will 'fall back' to below its target of 2.5 per cent before rising again to around the target level by the end of 2005.

The Bank's Inflation Report highlights that consumer spending has remained strong due to the conclusion of the conflict in Iraq and the pressures on the housing market have eased. Both the Nationwide and the Halifax's house price surveys have revealed growth of around 1% in the market during July.

Both mortgage lenders have argued that the conditions for the housing market remain strong as low unemployment and interest rates fuel demand for housing. However, the rate of growth has been reduced by a 20 year low of first time buyers entering the market because of affordability problems.

Figures released today by the Office for National Statistics show that unemployment has fallen again to a two-year low helping to make affordability on borrowing more possible.

However, record consumer borrowing on credit cards and on mortgages has caused some fears that if interest rates do rise then affordability will become a problem for many consumers, compounding any downturn in the economy.

Mr King added: 'Over the forecast horizon, the outlook for output growth is broadly similar to that in May.' In effect, the committee sees growth picking up and then falling back to 2.5 per cent by 2005.

However, Mr King said: 'The sluggish nature of the world recovery, and the resilience of consumer spending and house price inflation at home, point to real risks on both sides of the central projection.'

Disappointing performances in the US and in the Eurozone are expected to continue, but the Bank of England is hoping that British consumers will continue to spend and keep the UK's economy out of trouble.

Traditionally British consumers have been more of a driving factor in the UK's economy than manufacturing output which has been severely restricted by the low demand in the global market.

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