King: I was right not to raise rates

Julian Harris
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GOVERNOR Mervyn King used a defiant speech last night to defend the Bank of England’s record in the face of rising inflation and a stumbling economic recovery.

King’s speech came after shock figures – showing a 0.5 per cent contraction in the UK economy for the three months to December – had rocked the markets.

The FTSE ended the day at 5,917.71, down 26.14 points or 0.44 per cent. And the pound fell by 1.15 per cent against the dollar and slumped 1.07 per cent against the euro, a two and half month low. Manufacturing grew in the fourth quarter, the Office for National Statistics (ONS) said, but construction and services dropped. The fourth quarter contraction meant that GDP grew 1.4 per cent in 2010 as a whole.

King insisted that the recovery would have been dented even further if interest rates had been increased in recent months. He also defended the coalition’s austerity policy but predicted inflation of four to five per cent, more than twice the target.

He also warned that real wages would return to 2005 levels by the end of 2011 – the first time since the 1920s that real wages had suffered such a reversal.

“The squeeze on living standards is the inevitable price to pay for the financial crisis,” he said. Monetary policy cannot alter the price of global commodities, he argued. “Nor can it alter the burden of reducing our large budget deficit,” King said, before appearing to attack the previous Labour government.

“The economy as a whole must deal with the legacy of extraordinarily high debt levels built up prior to the crisis,” he said, before endorsing the current government’s “credible medium-term path of fiscal consolidation.”

Despite the shocking setback from yesterday’s GDP data, King stayed optimistic.

“The UK economy is well-placed to return to sustained growth, Of course, there will be ups and downs as the squalls from the world economy blow around us.”

Other economists questioned the validity of the GDP figures. “The ONS assessment is probably too downbeat -- it may have overestimated the weather hit to December,” said Henderson’s Simon Ward, dismissing talk of a double dip recession.

After surprisingly fast growth earlier in the year, the British economy – excluding the effects of the severe weather – stagnated in the final quarter, the ONS said.

The coldest December in 100 years was responsible for a massive 0.5 per cent decline in GDP, the ONS said.

New shadow chancellor Ed Balls pounced on the figures, claiming that people had “altered their behaviour” in anticipation of the impending cuts in public spending, harming economic growth. “Cuts which go too far and too fast will damage our economy,” he said.