From "The Age" and/or the (English) Daily Telegraph:
Bank of England predicts gloom
* Edmund Conway, London * June 12, 2008 *
THE Bank of England governor delivered a grim assessment on the economy on Tuesday as he warned that families faced the "longest period of financial turmoil that most of us can remember".
In a speech to bankers, Mervyn King raised the spectre of "stagflation", saying households faced "rising inflation and falling economic growth".
His comments came as the cost of some types of home loans hit an eight-year high, with experts predicting the average interest on a fixed-rate mortgage could rise to 7% by the end of the year.
Stagflation happens when high inflation and stagnant or shrinking growth combine to drag down the economy.
Mr King also undermined hopes that the worst of the financial crisis had passed.
"After a decade or more of economic stability, we are now facing a period of rising inflation and falling economic growth," he said.
"Part of the reason for this change of economic weather is that we are passing through the most prolonged period of financial turmoil that most of us can remember.
"Whether, as the IMF has argued, it is the worst period of financial stress since the 1930s is too early to judge. After all, the crisis is not yet over."
The governor said the North Rock crisis had exposed the structure set up by Prime Minister Gordon Brown to monitor the financial system as being "incomplete". His downbeat tone will do little to calm markets, fraught since Jean-Claude Trichet, president of the European Central Bank, indicated last week he was poised to raise rates.
With producer prices rising to record levels, traders are betting on the bank's monetary policy committee raising rates two or three times in the next 12 months, despite Britain facing a severe housing slowdown.
Mr King, who was speaking to the British Bankers' Association in London, said that the Government needed to overhaul the relationship between banks and their regulators.
Mr King said he did not believe the bank should be given back its supervision of the banking system, which was handed to the Financial Services Authority in 1997.
However, there were shortcomings with the memorandum of understanding that was supposed to determine which branch of the tripartite system — the Treasury, the FSA or the bank — would take the lead in a crisis.
"During my second term as governor I would like to see us establish a framework for financial stability that is on as sound a footing as the one we have successfully established for monetary stability," Mr King said.
The tripartite authorities were criticised following the Northern Rock collapse. The Commons Treasury committee warned that none of the three took charge of the crisis. Some have blamed the system for helping fuel the first run on a bank in Britain since Victorian times.
