Bank of England’s plea to Osborne after credit downgrade warning

| February 15, 2012 | 0 Comments

  • Sir Mervyn admits ‘limits’ to what printing more money will achieve
  • But relief as inflation falls from 4.2% to 3.6%
  • George Osborne hints he will cut corporation tax again in budget to encourage growth and job creation

By
Tim Shipman

Last updated at 12:46 AM on 15th February 2012


Warning: Sir Mervyn King said in his letter there are limits to what printing more money can achieve

Warning: Sir Mervyn King said in his letter there are limits to what printing more money can achieve

Action is needed to boost economic growth, the Governor of the Bank of England said yesterday.

Amid warnings that Britain could lose its prized AAA credit rating, Sir Mervyn King issued a downbeat assessment of the economic situation.

He told ministers there was no painless way of putting the country back on track and printing even more money was not the answer.

On Monday night the credit ratings agency Moody’s put Britain on a ‘negative outlook’ with a one in three chance of a downgrade within 18 months. Any such move would increase the cost of household and government borrowing.

Moody’s said further problems in the eurozone would threaten Britain’s future. But both the agency and Sir Mervyn said sluggish growth was a major danger.

Sir Mervyn issued his warning in a letter he is obliged to write to the Chancellor when inflation remains more than 1 per cent above the 2 per cent official target.

A report yesterday showed that the consumer prices index measure of inflation has dropped from 4.2 per cent to 3.6 per cent.

The Governor said: ‘The unwelcome combination of sluggish growth and high inflation over the past two years is a reflection of the need for the economy to rebalance following the financial crisis and associated deep recession.

‘The process of rebalancing still has a long way to go. Growth remains weak and unemployment is high.’

George Osborne: Chancellor hinted that corporation tax will be cut further in his Budget next month to encourage growth and job creation

George Osborne: Chancellor hinted that corporation tax will be cut further in his Budget next month to encourage growth and job creation

Referring to the policy of quantitative easing, which has pumped £325billion of new money into the economy, Sir Mervyn added: ‘There is a limit to what monetary policy can achieve when real adjustments are required.’

He supports the Government’s deficit reduction plans so his intervention cannot be interpreted as a call for tax cuts, or for a pause in austerity measures.

But his words were seen in Westminster and the City as a gloomy acknowledgement that rebalancing the economy will be a painful process and that higher growth is vital.

Chancellor George Osborne seized on the assessment by Moody’s as proof there was no alternative to his austerity programme.

In a rebuke to shadow chancellor Ed Balls, he said the report was ‘a reality check for anyone who thinks Britain can duck confronting its debts’.

He said: ‘We can’t waver in the path of dealing with our debts and here is yet another organisation warning Britain that if we spend or borrow too much we are going to lose our credit rating.

SAVERS MUST TIE UP CASH FOR YEARS TO AVOID LOSING OUT TO INFLATION

Savers must tie up their money for years or watch it lose its spending power, experts warned yesterday.

Even after a fall in the rate of inflation, it is impossible to find an instant access account which beats the cost of living.

The average rate is 0.21 per cent – or 0.61 per cent on a cash ISA – when the rate of inflation is 3.6 per cent. The only way to stop savings being eroded is to lock them away in a bond, with five-year accounts giving around 4.6 per cent.

Simon Rose, of campaign group Save our Savers, said: ‘People are just so angry and despairing about the situation with interest rates at an all-time low.

‘Savers feel they have done what they are supposed to do – that is, put money aside for the future – but they are being penalised for being prudent.’

To beat inflation, a basic rate taxpayer needs to find an account paying at least 4.51 per cent, rising to 6.01 per cent for a higher rate taxpayer.

‘It’s yet another reminder Britain doesn’t have some easy route out of the economic problems that have accumulated over the past decade, it’s got to confront those problems head-on and that’s precisely what I intend to do.’

Mr Osborne dropped heavy hints that he will use next month’s Budget to further cut corporation tax to encourage growth and job creation. ‘We are a pro-business government,’ he said. ‘We are cutting business taxes in order to make Britain an attractive place to start a business, run a business and employ people.’

Mr Balls said the move by Moody’s was a significant warning.

‘Moody’s is clear in its statement that the primary reason for Britain’s negative outlook is weaker growth prospects which are making it harder to get the deficit down,’ he added.

‘The case for a change of course and a real plan for jobs and growth is growing by the day.’

But David Cameron rejected that view yesterday. He said: ‘It’s a reminder that we inherited huge amounts of debt and a massive deficit from the previous government and it’s a reminder about how important it is to get that down. Why does a credit rating matter? It matters because the most important thing is to keep interest rates low, to keep mortgage rates low.’

Ratings agencies assess the creditworthiness of government and corporate borrowers and assign a score that tells lenders how likely it is they will get their money back.

The scores from Moody’s and its rivals carry weight because pension funds and some other investors are barred from putting money at too great a risk.

The European Commission also put Britain on a ‘must do better list’ along with 11 other countries including Spain, France and Italy.

In a report published yesterday it warned: ‘The high level of private debt is a concern also in a context of a weak public finance situation with high and increasing public debt.’

Here’s what other readers have said. Why not add your thoughts,
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The comments below have not been moderated.

Looking at the UK from over here , all you can see are politicians from all parties that seem to think it is their duty to ruin the UK .
The only industry that they seem keen on saving is the banking industry .

well that’s a waste of his time might as well talk to a plank of wood than try to tell Osborne.

Every time the BOE prints more FIAT money the value of the pound and what ever your wealth is worth in the UK goes down,simple answer invest abroad.Not every where in the world is suffering.

why dont they print a trillion and pay of our debt,simples.
– john , warrington england, 15/2/2012 07:33
____________________________________________________________________ John, Then they will have created £1 trillion worth of debt which will have to be paid back with interest. Please watch the 1st 40 minutes of zeitgeist the movie addendum, it’s on youtube and it will explain very well how money is created and how that money is debt, it’s a very easy to understand movie.

- The Ralph, Bremen, Germany, 15/2/2012 5:30
Nice try for the most red arrows ralph

Mervin and his quantum easing reminds me of the drought of1976,the irish solved the problem of the water shortage.THEY DILUTED IT!

The RAlph ,Bremmen ,Germany ,pop back into bed now ,the nurse is on her way with the meds ,and Susan Muscat ,i am not your mate ,

why dont they print a trillion and pay of our debt,simples.

This government is not being honest ,when the derivatves market implodes ,the UK is bankrupt beyond bankrupt,

Rebalancing has been essential for years, but it doesn’t start by allowing government rail contracts to go to the Germans. 90% of French rail contracts go to French companies, 100% of German rail contracts go to German companies, they are in the same EU we are, so let’s ensure government contracts go to British firms

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