By Sky News business correspondent Joel Hills

This morning, I listened to the Governor of the Bank of England's assessment of where the UK economy is heading.

Since the last Quarterly Inflation Report in November, the Bank’s forecasts have changed for the worse.

The credit crunch that swept over the Atlantic from the United States has led the Bank to revise down its forecasts for UK economic growth.

Meanwhile, its inflation forecast is that in the coming months higher energy prices, and high food and oil prices will push up the cost of living. Slower growth and slowing demand is also expected to lead to a slight rise in unemployment (figures just out show a fall of 61,000 last month to 1.6m people.

The Governor, though, insists that we shouldn't get too dispirited. 

Sure, higher prices will inevitably mean many people will feel their standard of living is falling and it’s an "odds-on bet" that the Governor will have to fire off at least one letter to the Chancellor, asking for forgiveness for the high rate of inflation, but this is not the 1970s.

Mervyn King sees inflation falling back towards target in the long-term.

At times, this morning, he sounded almost optimistic: he says that a housing crash is highly unlikely, a period of house-price stagnation more probable and something to be celebrated; retailers may bear the brunt of weaker consumer spending for a season or two but manufacturers and exports can look forward to good times ahead; and not even in the Bank of England's worst case scenario does it forecast the UK economy tipping into recession over the next few years.

Mervyn King agreed there was plenty of uncertainty around and freely admits there are risks ahead but he insists we shouldn't get carried away - as he put it the economic data "cannot be described as gloom and doom". So, as it stands, as the Bank of England sees it, we are in for a few months of turbulence – of slower growth and a spike in inflation - discomfort is unavoidable but the economy can and will come through in reasonably good shape.

In the past, the Bank of England's forecasting has been, at times, a little optimistic but almost always spot on.

The Bank anticipated last year's spike in inflation and accurately predicted it would fall back again.

Lowering or raising interest rates gives the Bank of England significant influence over the way we borrow, save, import and export.

The power to manipulate interest-rates gives the Bank the ability to both make predictions about our economic future and then steer our economy in that direction.

But the UK economy does not operate in splendid isolation; our fortunes are tied to the fortunes of others.

In the coming months, what happens to the US economy and the economies of China and India, in particular, will prove of more importance to our prosperity than a slight movement in interest-rates. In many ways our economic future can only be guessed at and is out of Bank of England's control.

Comments

[Robert, Scotland 16 Feb 2008 09:52:07]

Mervyn King's first priority before he makes any sensible comment on the state of the Nation's economy should be to make sure he is dealing from a full deck of cards (tarot).
The inflation figures he refers to are straight from the "Alice in Wonderland" tables devised by a Government determined to hide the true inflation figures from the Country. This Government loves to quote 15% inflation when the Tories were in power but neglects to add that these figures came from a more transparent and honest way of reporting.
Mervyn like many economists is in love with Bar and Pye charts but fails to recognise the golden rule "they are only the product of what you allow to go in".
Exam the level of the Public Sector Borrowing requirement after all these years of much publicised successive and sustained growth. Then consider it does not include the costs to the Nation of Private Finance Iniatives (PFI's) or the present and future costs of Public Sector Pension provision.
Until Mervyn acknowledges these truths his pronouncements ring as hollow as those of Gordon Brown's other puppet Alistair Darling.

[Dennis, Cramlington Northumberland 16 Feb 2008 08:37:25]

I mean, I know it is really Merv who is suggesting it..whereas you appear to possibly be neutral, Noel.

This whole Northern Rock fiasco is an absolute blight on this Government, and on the once-proud reputation of the UK Banking system.

Much doom and even more gloom.

Spikes or not.

Dennis
Cramlington
Northumberland

[Dennis, Cramlington Northumberland 14 Feb 2008 20:54:49]

Merv King may well be a very decent bloke, and certainly a man of no little skill; but, he is of course human, and, I think, open to pressure from certain quarters...and he had a new contract in the offing, we should not ignore.

I mean come on, while else would he pontificate the 'moral hazard' in the very very sad Northern Rock affair, unless he was subject to leanings from somewhere - especially given the now public 'substantial' Spanish support for their own Spanish Banks hit by the same 'credit crunch'& bank lending issues...

Perhaps, without undue influence, from wherever, he might actually have used his considerable skill and acumen to quietly sort these things out without hysteria, panic and a bank run.

Perhaps he would have easily been able to see sense, and to prevent the British Banking credibility and reputation being damaged forever - whilst being castigated on the whim of self-righteous smugness of a Government who now may very well have to become Mortgage Lenders to save face for themselves (and make a lot of innocent victims unemployed in the bargain).

And, look at the damage.
Look at the fallout.

And yet you care to suggest, Noel, that there is 'no need for Doom & Gloom'?

Are you on pills?

Respectfully

Dennis
Cramlington
Northumberland

[Khalid 13 Feb 2008 16:18:04]

Indeed as you state, unless the independence of the bank is allowed to structure UK finances, notwithstanding global activity, then as has been proven, the [Madness] that has been created in [Our House] will cary on.
China whilst currently in the news because of Stephen Speilberg' perverse stance, insofar as he knew what he was committing himself to before making sport political, further gives rise to many a concern that film directors should stick to films and leave the real world to capable people like Mervyn King to deal with.
Insofar as Darfur, yes the Sudan needs to do more, but the question arises, where was Stephen Speilberg all those years ago and why has he chosen to cause market turbulance at this juncture?
So, lets all be sportsman and leave politcs out of the money sport if we are to truly benefit from independant market control. Other than that if I may, did'nt his films portray violence and destruction or does that not matter?