Nice Decade over, Says King in Stern Inflation Warning; ECONOMICS

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Byline: By Nevill Boyd Maunsell Economics Editor

The prospect of further interest rate cuts this year slipped off the agenda yesterday after the Bank of England's governor Mervyn King gave a stern warning that the Bank will bring inflation back to its two per cent target within its two-year horizon - even at the cost of lowering the standard of living.

He discounted fears of an outright recession in Britain, but stopped short of dismissing them altogether.

"Our central projection is for a sharp slowdown of growth and it is quite possible that we may get a quarter or two of negative growth." he warned.

"Recession is not the central projection at all, although clearly further shocks could push us in that direction."

The most likely outcome, in the Bank's view is that Britain's economic growth will sink back to about one per cent next winter before recovering to the long-running average of 2.5 per cent in two years' time.

Without any more interest rate cuts the scenario would be only fractionally worse, according to the Bank's latest quarterly Inflation Report.

It contained charts depicting the likely course of inflation, first if interest rates are cut once or twice this year as City markets expected when the report was compiled a few days ago.

That shows inflation still perceptibly above the two per cent target in the spring of 2010 after peaking only just short of four per cent this winter.

A second chart assuming that the Bank's rate stays at the present five per cent shows a peak of about 3. …