The governor of the Bank of England said yesterday that Britain’s recovery from recession is fragile and that the next few months are likely to be volatile.
Governor Mervyn King told a parliamentary committee that recovery appeared to have stalled in the euro area, Britain’s largest export market.
“The tensions that underlay the build up of large world imbalances have not been resolved,” King told the House of Commons Treasury Committee.
“And, at home, bank lending to the non-financial sector continues to fall,” he said.
While the bank’s rate-setting Monetary Policy Committee expects a gradual recovery, King said, risks remain on the downside.
King said the bank’s £200 billion (US$310 billion) economic stimulus program of asset purchases, combined with a record low base rate, would provide a boost for some time.
The effect of the purchases is to increase the supply of money in the economy, a measure taken to counter steep downturns.
He said that Britain’s economy also benefited from a fall in the value of the pound in 2007 and 2008.
That makes British exports more competitive on price.
“Judging how these various factors will play out is an extremely difficult challenge,” King said.
In Tokyo yesterday, Japanese Finance Minister Naoto Kan put further pressure on the Bank of Japan (BOJ), telling it to do its part to fight deflation.
“The government will do its part, so I want the BOJ to do what it should do,” Kan told reporters.
“I have no wish to tell it to take specific actions. I am saying we should work together since we hold the shared understanding that we are yet to overcome deflation,” he said.
Kan, who became finance minister last month, has been advocating for the government and the central bank to aim for a positive annual inflation rate of about 1 percent to pull the nation out of the economic doldrums.
In November, the government said Japan was in deflation, citing falling consumer prices, but economists believe deflation had plagued the country for years.
The BOJ has already slashed interest rates to just 0.1 percent and pumped trillions of yen into the financial system to boost the economy.
But politicians have criticized it for not doing enough to ward off the threat of another deflationary spiral as seen after the country’s economic bubble burst in the early 1990s.
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