BANK of England governor Mervyn King warned yesterday that the current troubles in the Eurozone could derail Britain’s economic recovery and an extension of the Bank’s emergency £200bn quantitative easing programme may be needed if the economy deteriorates further.
Speaking in front of the Treasury Select Committee, King said that recovery in the Eurozone appeared to have stalled. He added that further QE may consequently be needed. “My particular concerns at present derive from the state of the world economy and our largest trading partner, the euro area.”
Sterling fell sharply against the US dollar during the hearing, from $1.5539 to $1.5413.
While King’s comments clearly hinted at further QE and said that the Bank’s Monetary Policy Committee stood ready to do what seemed appropriate, the risk of higher inflation had been part of the decision to pause QE. “Inflation is very much above target now and it will stay there for a while. We don’t want to run the risk of inflation expectations moving up and being dislodged from the target.”
Speaking at a separate event yesterday, Bank of England deputy governor Paul Tucker cautioned that the UK faces the threat of stagflation if strong growth does not return quickly. The loss in output as a result of the recession could become more firmly entrenched and limit firms’ ability to meet demand when the economy starts to recover, thereby driving up inflation. If demand recovers robustly, firms are likely to bring some capacity back on line. If, on the other hand, demand proves anaemic, then suspended-capacity is more likely to be permanently scrapped,” he said.