THERE are bleak years ahead for the British economy, according to the governor of the Bank of England.
Interest rates will have to rise to combat the return of inflation and the standard of living will drop, said Mervyn King in an explosive speech at the University of Exeter last night.
He believes it will take years before the economy is completely recovered from the slump.
His words came just hours after new statistics showed the rate of inflation surged by one per cent last month. The Consumer Price Index (CPI) hit 2.9 per cent – well above the Bank’s target of two per cent. It was up from 1.9 per cent in November.
And King believes inflation will rise to well over three per cent.
He said: “The patience of UK households is likely to be sorely tried over the next couple of years.
“There is little scope for growth in real take-home pay, which may remain weak even as output recovers. It is clear that inflation is likely to pick up markedly in the first half of this year. The full impact of the financial crisis has yet to be seen.”
He also criticised the government’s plans to reduce the budget deficit as too unambitious, saying swifter action is required. The budget deficit stands at £178bn and Darling has pledged to halve this by 2014.
The comments will be seen as a slap in the face for Labour, whose election campaign hinges on its commitment to improving the UK economy. Figures expected next week will confirm Britain has emerged from the recession.
The Conservatives last night seized on the speech, reiterating their pledge to cut spending quicker than Labour.