BoE chief warns of tough times

27 March 2008

The governor of the Bank of England has warned that there may be tougher times ahead for the UK economy as the credit crunch enters a 'new phase'.

Mervyn King told the Commons Treasury that this year would see the cost of living rise further against increases in wages, as food, fuel and energy costs soar.

House prices in the UK are unlikely to rise "markedly above where they are now" over the next few years, he said, but he added that this slowdown does not necessarily mean a slump.

"Across the world, confidence in financial markets is fragile. It is not that banks, at least in the UK, have made loans that are likely to result in unsustainable losses," Mr King said.

"The heart of the problem is not in the real economy. It is in the financial sector itself."

He said that greater regulation of the banking sector could be necessary to guard against a similar situation in the future as the recent crisis "arose out of the heart of the financial systems in the main financial centers".

While the Bank's Monetary Policy Committee would consider further cuts to the base rate to promote growth in the economy, Mr King warned that inflation remains a concern and that the committee "can have little effect on the short-term path of inflation".

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