Britain set for 'modest recovery'

The British economy looks set for a moderate recovery starting later this year as falling inflation eases the squeeze on household incomes, Bank of England deputy governor Charles Bean has said.

While he welcomed the latest bailout deal for Greece, Mr Bean said in a speech at a business event in Glasgow yesterday that the euro zone debt crisis remains the single biggest risk to the UK economy, which may see slow growth until mid-year.

"Despite the recent more encouraging signs, we continue to expect underlying growth to remain sluggish in the first half of the year," Mr Bean said.

The expected fall in inflation should help a modest pickup in household spending, he said, noting that the strong retail sales seen in January could be a first sign of this.

"But while growth should gradually strengthen, the continuing headwinds from the unwinding of excessive debt and the government's continuing fiscal consolidation mean that the pace of recovery is likely to remain moderate by historical standards," he said.

Mr Bean's analysis largely echoed the views presented in the bank's February inflation report in which the bank predicted that growth would improve later this year and that inflation would be close to its 2 per cent target over the key two-year horizon.

That forecast has fuelled the view the bank may not add further stimulus when the latest £50 billion round of asset purchases is complete in May.

Mr Bean said the euro crisis remained the biggest risk for Britain despite the new bailout deal for Greece.

"While the agreement between the Greek government and the euro-area authorities is certainly welcome, there still remains a possibility that events could unfold in a disorderly and damaging fashion at some stage in the future."

Mr Bean defended the bank's early-February decision to pump £50 billion more into the economy in its quantitative easing programme of asset purchases, saying that without this inflation would have been likely to stay below the bank's 2 per cent target in the medium-term.

But he also reiterated the bank's view that it could not set monetary policy in a pre-emptive way to shield the economy against worst-case scenarios.

"It would make little sense to set the level of asset purchases so as to try to counteract an extreme event whose likelihood, timing and magnitude we have no realistic way of assessing," he said.

In his speech in Glasgow, Mr Bean also touched on the debate about the possibility of Scottish independence, saying the central bank could not define its own role in such a scenario.

"If the referendum should result in a vote in favour of an independent Scotland, the associated monetary arrangements would then be one of many matters needing to be settled," he said. "But the exact form of those arrangements would be for the Westminster and Scottish parliaments to decide, not the Bank of England."

Scottish National Party leader and first minister in Scotland's devolved government, Alex Salmond, has said he would want to keep the pound, at least temporarily. This would allow Scotland to control taxes, spending and borrowing while the Bank of England would continue to set monetary policy.

Reuters