Mervyn King hailed the new Government's plan to cut public spending by 6bn this year as he delivered the Bank of England's quarterly Inflation Report yesterday, but the Governor also warned David Cameron's administration that the risks to an economic recovery remain serious.
The deficit reduction measure was a centrepiece of the Conservatives' election campaign that drew stinging criticism from other parties, including the Liberal Democrats, which said that such heavy spending reductions this year threatened to tip the economy back into recession.
But Mr King said that the cuts would placate the markets, which have been nervously awaiting the formation of a new government, and would help to limit future borrowing costs. The cuts would "diminish some of the downside risks because of action to deal with the deficit ... I think they are desirable to remove the risk of an adverse market reaction," he said.
The Governor's comments came as the new Chancellor, George Osborne, said that "there is going to be a significant acceleration in the reduction of the structural deficit". Mr Osborne also announced that the Bank would be "responsible for macro-prudential regulation".
Despite voicing his approval for the cuts, Mr King was also stark in his warning that "the financial crisis is far from over", checking renewed confidence in the markets.
The UK emerged from recession at the end of last year. Last month, the Office for National Statistics said that the economy had grown by 0.2 per cent in the first three months of the year.
In yesterday's report, the Bank said that inflation was likely to remain above 2 per cent for the …