UK economy starts stabilising, says BoE governor

Bank of England governor Mervyn King yesterday said that there were "some signs that the British economy is beginning to stabilise, and financial markets have improved markedly.''

King expects the economy to recover at some point this year.

In a speech at the Lord Mayor's banquet for London bankers and businesses, King said that there were "three solid reasons" for believing that a recovery was likely to occur at some point this year.

King called the first the ''Honda effect'' stating, ''many firms, as Honda did last year at its plant in Swindon, cut back production and met demand from stock, resuming production this year once inventories had been reduced.''

The second factor he said was the level of the pound sterling which, despite its recent rally, was still some 20-per cent lower than in the summer of 2007. "That will encourage a switch in spending, at home and abroad, towards goods and services produced in the UK.''

And finally the most important factor King said was ''the enormous policy stimulus that has been injected into the economy.''

He said the monetary policy committee has embarked on a programme of asset purchases designed to increase the money supply and improve conditions in non-bank corporate credit markets which will be shortly extended to working capital finance, particular helpful to smaller companies.

However, there is a limit to the scope of the Bank's activities in allocation of public credit to individual companies or sectors.

''The current market sentiment it may take further additions to equity capital before the banking system will be able to supply credit at a price and on a scale to finance a sustained recovery which is likely to take time.'' King said.

The bank's aim is to increase the money supply. He said ''there are already tentative signs that the programme is beginning to have beneficial effects with the growth rate of broad money picking up.''

He said ''there are certainly grounds for believing that the rapid falls in activity are coming to an end. But there are some equally solid reasons for believing that the path to full recovery could be protracted.''

He said that the national debt five years from now, as a proportion of national income, is expected to be more than double its level before the crisis.

The next Parliament plan should be to reduce the deficit, gradually declining the ratio of national debt to national income, he indicated.

He said that the challenge facing the Monetary Policy Committee is reaching a ''judgement on the outlook for inflation is never easy, and assessing their implications for policy will always be a matter of balancing risks.''

He acknowledged that ''change to the structure, regulation and indeed culture of our banking system is necessary.''