In a speech to the Institute of Directors in Bristol, Merv admitted that the UK economy would have to ‘navigate some distinctly choppy waters in 2008’, and that the Bank was facing its greatest challenges since independence in 1997. But he insisted that its policies would allow business leaders ‘not to be overwhelmed by the headlines and to focus on what really matters for our future prosperity – the successful running of your own businesses’.
Most of these ill winds responsible for these choppy waters were blowing in from outside the UK, the governor argued. From the west came the various woes in the credit markets, which had made it much more expensive for households and companies to borrow money – this would rein in spending and depress growth. And in the east, strong demand has led to an increase in energy and fuel prices, which was likely to push inflation above the government’s 2% target. So Merv is likely to be writing a few letters of explanation to the chancellor in the coming months.
But it’s not all bad news, he said. The change in conditions should at least mean that we start saving more of our money, rather than frittering it away on digital photo frames and unnecessary loft extensions. Currently the national saving rate is too low, he argued, which is why we’re now borrowing more from overseas than any other country in the G7, and more than we’ve done for 50 years. Which sounds a bit scary.
The governor’s speech came just hours after the Federal Reserve announced its biggest single rate cut in 20 years, so the City was looking for a hint as to whether the Bank was likely to follow suit. Judging from his comments on inflation, he’s unlikely to be quite so gung-ho.
However, King was at pains to reassure the IoD that it wasn’t quite wrist-slitting time. Things may not be as NICE as they were last year (and by that, of course, we mean non-inflationary consistently expansionary – Merv’s catchy acronym) but the Bank’s policy framework does provide ‘a seaworthy vessel [to] reach the calmer waters’. The governor will just be hoping that he’s allowed to stick around long enough to captain the ship…