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No more Mr Nice guy as King warns of rocky road

Hopes of further interest rate cuts have been dashed after Bank of England governor Mervyn King warned that inflation could reach 4 per cent this year.

King said last week that a recession was unlikely based on current assumptions although this could well change if the economy is hit by further shocks.

Launching the BoE inflation report last week, he said: “It is quite possible that we may get an odd quarter or two of negative growth but not recession, although further shocks could push us in that direction.”

King said the “Nice decade” was behind us, referring to the non-inflationary consistent expansion of the past 10 years. He warned that rising energy and import prices would “almost certainly” push inflation higher. He said the BoE should not prevent the adjustment.

He said: “The credit cycle has turned. We are travelling a bumpy road as the economy rebalances. Monetary policy cannot and should not try to prevent that adjustment. Inflation will return to the target and growth will eventually recover to a sustainable rate but we will have to be patient.”

King considers that inflation is likely to remain above the current level of 3 per cent for at least nine months which would hit economic growth. He also warned there would be a continued “squeeze in real incomes” and “very slow growth in take-home pay”.

But he is not concerned that property repossessions will spiral out of control. He noted: “Repossessions are markedly below the levels of the early 1990s. What caused the problem then was the doubling of interest rates and the sharp increase in unemployment and neither apply at present.”

Liberal Democrat Shadow Chancellor Vince Cable says: “On one hand, we have a rapidly slowing economy and on the other we have rocketing inflation.

“The BoE will find it ever more difficult to justify cutting interest rates if it is to meet its inflation target. The Prime Minister has to face the fact that the economy is now heading for the rocks and take action.”

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