Any attempt to bring inflation down to the Bank of England’s target of 2% would have made the economic situation worse, according to Bank of England governor Mervyn King.
Appearing in front of the Treasury select committee, King told MPs that if the Bank had raised interest rates in an attempt to bring down the current 5% rate of inflation, unemployment and output would have been negatively affected.
King also insisted that inflation growth in the UK is due to external and unexpected global factors, such as the VAT rise and energy bill increases.
“Domestically generated inflation is probably below what we expected,” King said at the Bank of England’s November 2011 inflation report.
The committee asked King about the downward revisions to GDP growth which were attributed to the ongoing sovereign debt crisis, a 35% increase in energy costs, a 25% drop in the value of sterling, higher food prices and the VAT increase in January.
King repeatedly deferred to these external contributers throughout the report while saying the bulk of the downwards growth revisions was a result of the sovereign debt crisis.
The governor was keen to present these external factors as unexpected and unique, and stressed that while take-home pay was “squeezed” as a result in 2011, it won’t happen again next year.
“0.2% growth or 0.2% [negative] growth is not important. The framework in which growth can pick up is important,” says King.
He also defended the use of the asset purchase programme, while admitting inflation could have been around 1% lower, King maintained that quantitative easing avoided the risk of deflation.
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