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Risks remain “to the downside” says King

The risks to the Monetary Policy Committee’s view of a gradual recovery in Britain’s output “remain to the downside” said Mervyn King, governor of the Bank of England, today at a treasury committee hearing.

King said while there have been signs of a recovery in both domestic and global demand, “the tensions that underlay the build up of large world inbalances have not been resolved”.

He said: “To maintain levels of economic activity around the world, high-saving countries must expand their domestic demand while low-saving countries are reducing their net borrowing from abroad. At present, there is little evidence that this is taking place.”

It was because of these “headwinds” that King explained the MPC decided to leave interest rates at 0.5 per cent at its February meeting and maintain its asset purchasing programme at £200 billion.

Spare capacity is likely to put downward pressure on inflation, said King, although it is likely to remain above its 3 per cent threshold for a few months. It is “more likely than not” to fall below the government’s 2 per cent target in the second half of this year.

“The committee believes that the current high level of inflation reflects temporary factors, such as the restoration of the standard rate of VAT to 17.5 per cent, higher oil prices, and the effects of the exchange rate depreciation continuing to feed through,” he said.

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